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'Private Student Loan Industry' by the CFPB

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'Private Student Loan Industry' by the CFPB Powered By Docstoc
					july 20, 2012




Private Student Loans

Report to the Senate Committee on Banking, Housing, and Urban Affairs, the Senate
Committee on Health, Education, Labor, and Pensions, the House of Representatives
Committee on Financial Services, and the House of Representatives Committee on
Education and the Workforce.
Table of Contents
EXECUTIVE SUMMARY ..................................................................................... 3	
  
INTRODUCTORY MATTERS ............................................................................. 6	
  
PART ONE: LENDERS, LOAN MARKETS AND PRODUCTS ......................... 9	
  
PART TWO: BORROWER CHARACTERISTICS AND BEHAVIORS ............. 35	
  
PART THREE: CONSUMER PROTECTION .................................................... 67	
  
PART FOUR: FAIR LENDING ISSUES ............................................................. 78	
  
PART FIVE: RECOMMENDATIONS ............................................................... 86	
  
DATA APPENDIX I: FURTHER INFORMATION ABOUT DATA SOURCES 93	
  
DATA APPENDIX II: ADDITIONAL FIGURES AND TABLES ........................ 96	
  
STUDENT LOAN GLOSSARY ........................................................................ 104	
  
REFERENCES AND NOTES ........................................................................... 109	
  




     2               PRIVATE STUDENT LOANS
Executive Summary
American consumers owe more than $150 billion in outstanding private student loan
debt. While this amount is significantly less than the amount outstanding on student
loans guaranteed by the federal government, the private student loan (“PSL”) product
is an important component of higher education finance and does not appear to be well
understood by the public.

In this Report, the Consumer Financial Protection Bureau and the US Department of
Education seek to highlight key attributes of the private student loan marketplace, as
well as consumer protection issues which policymakers may wish to address. Below
are some of our key findings:

IN THE LAST DECADE, PRIVATE STUDENT LOAN ORIGINATION
RAPIDLY GREW AND THEN PRECIPITOUSLY DECLINED.
Fueled by investor appetite for asset-backed securities, the financial institution private
student loan market grew from less than $5 billion in 2001 to over $20 billion in 2008,
before contracting to less than $6 billion in 2011.

DURING THE GROWTH PERIOD, PRIVATE STUDENT LENDER
UNDERWRITING STANDARDS LOOSENED.
From 2005 – 2007, lenders increasingly marketed and disbursed loans directly to
students, reducing the involvement of schools in the process; indeed during this
period, the percentage of loans to undergraduates made without school involvement or
certification of need grew from 40% to over 70%. As a result, many students borrowed
more than they needed to finance their education. Additionally, during this period,
lenders were more likely to originate loans to borrowers with lower credit scores than
they had previously been. These trends made private student loans riskier for
consumers.

SINCE 2008, LENDERS HAVE CHANGED THEIR UNDERWRITING AND
MARKETING PRACTICES.
After 2008 lenders rapidly increased the share of loans with a co-signer, from 67% in
2008 to over 85% in 2009. In 2011, over 90% of private student loans were co-signed.

    3            PRIVATE STUDENT LOANS
In addition, in 2011, 90% of private student loans to undergraduates required the
school to certify the student’s need for financing. Lenders have also increased overall
credit scores within their portfolios by tightening credit standards and reducing lending
to nonprime borrowers.

MANY BORROWERS MIGHT NOT HAVE CLEARLY UNDERSTOOD THE
DIFFERENCES BETWEEN FEDERAL AND PRIVATE STUDENT LOANS.
Many private student loan borrowers did not exhaust their federal Stafford Loan limits
before turning to the private loan product. Some borrowers reported that they did not
know they had fewer options when repaying their private student loans than they did
with their federal student loans.

SOME GROUPS OF BORROWERS USED PRIVATE STUDENT LOANS
SUBSTANTIALLY MORE THAN OTHERS.
In 2008, 42% of undergraduates at for-profit colleges took out a private student loan,
while only 14% of all undergraduates used a private student loan.

MANY BORROWERS ARE STRUGGLING TO REPAY THEIR PRIVATE
STUDENT LOANS.
In 2009, the unemployment rate for private student loan borrowers who started school
in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year
colleges have monthly payments for all education loans in excess of 25% of their
income. Default rates have spiked significantly since the financial crisis of 2008.
Cumulative defaults on private student loans exceed $8 billion, and represent over
850,000 distinct loans.

PRIVATE STUDENT LENDERS ARE HETEROGENEOUS, WITH SOME
DISTINCT SECTORS THAT PRESENT VARYING LEVELS OF RISK.
Traditional financial institutions dominate the private student lending market. There
are also non-profit state-affiliated lenders who produce a smaller volume of private
loan products that are distinct from bank loans. Finally, institutions of higher
education lend their own funds in a large number of small programs, about which
there is very little public information.

The Director of the Consumer Financial Protection Bureau and the Secretary of
Education have each put forth a series of recommendations to Congress to improve
the private student loan marketplace and address consumer protection issues.

Richard Cordray, the Director of the CFPB, asks that Congress enhance the role of
schools in the private student loan origination process, examine the appropriateness of
the bankruptcy discharge standard, and modernize the regulatory framework to ensure
a competitive, level playing field where consumers fully understand their debt
obligations and lenders have appropriate data to make underwriting decisions.

Arne Duncan, the Secretary of Education, asks that Congress require institutions of
higher education and private education lenders work proactively to protect and inform
private student loan borrowers, work with the Department of Education and the
CFPB to determine how to afford greater flexibility and relief to private student loan


    4            PRIVATE STUDENT LOANS
borrowers who are experiencing financial distress, and amend the definition of private
education loan to exclude other Federal education loans. Secretary Duncan also
recommends that the Department of Education and the CFPB work with Congress to
identify the necessary resources to provide a comprehensive picture of student
borrowing that is inclusive of both federal and private student loans.

The study was informed by data provided by lenders in the marketplace, existing data
sets maintained by the Department of Education, as well as input from financial
institutions, the higher education community, consumer advocates, and individual
borrowers.




    5            PRIVATE STUDENT LOANS
Introductory Matters
STATUTORY MANDATE AND APPROACH OF THIS REPORT

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the
Director of the Consumer Financial Protection Bureau and the Secretary of Education
to submit a Report on private student loans.1

This Report addresses the following topics, as set forth in the Act:2

    •   The private lenders, their market and their products, as they have evolved and
        performed over time,
    •   The consumers of these products, their characteristics, and shopping, usage
        and repayment behaviors,
    •   Consumer protections, including recent changes and possible gaps,
    •   Fair lending compliance information currently available and its implications,
        and
    •   Statutory or legislative recommendations to improve consumer protections.


The CFPB and the Department of Education (collectively, “The Agencies”) have
approached these questions by gathering data from existing studies conducted by the
Department of Education, gathering new market-wide data from the industry, and
seeking public input. While the Agencies have consulted consumer and industry
stakeholders in preparing this Report, the Agencies chose principally to use a data-
driven approach using more detailed information than has been available in the past.

The approach in Part One of this Report is to tell the story of the origin, growth,
evolution and near-collapse of the PSL industry. That story can only be understood in
the light of the federal Stafford Loan program, which PSLs were originally designed to
supplement and support. Federal Stafford loans are in many ways a better product
than PSLs for large categories of consumers, so the story of PSL competition with
Stafford loans is also important.

Against the backdrop of the PSL and federal student loan products, markets, and
processes, the Report then explains (in Part Two) how consumers have interacted with

    6            PRIVATE STUDENT LOANS
PSLs. The report provides an analysis of both industry-wide loan performance data
and survey data collected over many years by the Department of Education’s National
Center for Educational Statistics (“NCES”). Part Two also draws on the nearly 2,000
consumer comments received in response to a public request for information.

In the third and fourth parts, the Report addresses existing federal consumer
protection laws and fair lending compliance issues in the ways that PSLs are provided
to consumers.

Finally, the CFPB Director and the Secretary of Education each put forth
recommendations to Congress, in accordance with the Act.


DATA SOURCES AND TERMS USED IN THIS REPORT

The data sources relied upon in this Report are described in detail in the accompanying
Data Sources Panel. The attached Glossary also explains the terms used in the
Report to describe the PSL market and the various data sources.




DATA SOURCES PANEL
                             A data set created for this study in which records from all educational loan originations of 9
                                           3
                             major lenders for all loans originated from 2005 to 2011 were pooled and provided to the
                             Agencies. The data does not identify the specific lender for each loan. Each unique
                             borrower-lender pair is identified by a unique within-lender borrower identifier, so serial
SAMPLE LENDER LOAN           borrowing can be seen, but a borrower who borrowed from more than one of these lenders
LEVEL DATA (LOAN-            over the sample period would appear as two unique borrower-lender pairs that cannot be
LEVEL DATA)                  linked. The dataset consists of 5,456,689 unique records and 3,478,146 distinct borrower-
                             lender pairs. Schools in the lender data are identified by Office of Postsecondary Education
                             codes (OPEID), and the only demographic information available about borrowers is their
                             state of residence.

                             Quarterly performance data on educational loans originated and/or purchased by the 9
                             major lenders who provided the loan level data, aggregated across lenders. Each
SAMPLE LENDER                observation represents the performance of a single vintage (all loans originated in a specific
PORTFOLIO LEVEL              year), and includes information about dollar volumes and counts of loans by status (e.g.
DATA (PORTFOLIO              current, 30-day delinquent, in forbearance, in default, in bankruptcy). The sample includes
DATA)                        performance for all quarters of 2005 through 2011 for origination vintages 1999 through
                             2011, resulting in 295 records.

                             The 9 major lenders who provided the loan level and portfolio level data also answered a
                             series of qualitative questions about current loan terms and conditions (as of December 31,
                             2011), historical changes in underwriting criteria (such as the use of cohort default rate),
SAMPLE LENDER                deferral and forbearance policies, and default management. The lenders were identified by a
QUALITATIVE                  number or letter that changed with each set of responses, so that all of the data for one
RESPONSES                    lender within one response can be connected, but it is not possible to connect a single
                             lender across responses to multiple questions. Thus, for example, it is not possible to
                             compare a specific lender’s underwriting practices to its current terms and conditions.



    7            PRIVATE STUDENT LOANS
                       Lender de-identified, portfolio-level data provided by 5 state-affiliated non-profit lenders for
                       educational loans entering repayment from 1997 to 2011. The sample includes annual
STATE LENDER DATA
                       performance data from 1997 through 2011.

                       In a Request for Information published in the Federal Register on November 17, 2011 the
RESPONSES TO           CFPB solicited comments on private education loans and related consumer financial
REQUEST FOR            products and services used to finance postsecondary education. By the closing of the
INFORMATION            comment period, January 17, 2012, nearly 2,000 comments were submitted. These
REGARDING PRIVATE      comments can be accessed by visiting the regulations.gov web portal. Docket No. CFPB-
EDUCATIONAL LOANS      2011-0037 (Public Comments).

                       Nationally representative survey of students enrolled in eligible postsecondary institutions in
                       the United States and Puerto Rico conducted by the National Center for Educational
                       Statistics every 3 or 4 years using institutional records, government databases, and student
NATIONAL POST-         interviews. This study primarily uses the 2008 wave of the NPSAS which focuses on the
SECONDARY STUDENT      2007-2008 academic year, as well as the 2004 wave. NPSAS data was tabulated using the
AID STUDY (NPSAS)      NCES PowerStats web application (http://nces.ed.gov/datalab/ ). Additional
                       documentation about the NPSAS can be found on the NCES website
                       (http://nces.ed.gov/surveys/npsas/about.asp ).

                       Longitudinal study that follows a subset of NPSAS respondents who began their
                       postsecondary education during a given NPSAS year, and includes both those who complete
BEGINNING
                       and who do not complete their degrees. For the purpose of this study, attention is focused
POSTSECONDARY
                       on BPS:04/09 (NPSAS:04). BPS data was tabulated through the NCES PowerStats web
STUDENTS (BPS)
                       application.


INTEGRATED POST-       Annual survey of all post-secondary institutions that participate in federal student aid
                       programs conducted by the National Center for Educational Statistics (NCES). Includes
SECONDARY
                       variables on enrollments, tuition and fees, student financial aid, and graduation rates.
EDUCATIONAL SYSTEM
                       (http://nces.ed.gov/ipeds/datacenter/)
(IPEDS)

POSTSECONDARY          Department of Education’s management information system for administering student
                       financial aid. Includes school level data on topics including school characteristics, cohort
EDUCATION
                       default rates, and eligibility status.
PARTICIPANTS SYSTEM
                       (http://www2.ed.gov/offices/OSFAP/PEPS/dataextracts.html )
(PEPS)

CONSUMER PRICE         Series ID CUUS0000SA0, 2002-2012, used to inflation-adjust other datasets. Downloaded
INDEX-ALL URBAN        from the Bureau of Labor Statistics website on April 13, 2012.
CONSUMERS (CPI-U)




   8        PRIVATE STUDENT LOANS
Part One:
Lenders, Loan Markets
and Products
The PSL market consists of three types of lenders: (1) depository and non-depository
financial institutions,4 (2) non-profit lenders, many of which are affiliated with states,
and (3) certain schools that elect to fund or effectively guarantee loans (institutional
lenders). Financial institutions make up the majority of the market, with schools and
state affiliates making approximately $1.9 billion a year in new loans out of a total of
$7.9 billion in 2010-2011.5 This Report focuses primarily on the financial institution
segment of the market, but turns to the other market segments at the end of Part One.
Before turning to the history of PSLs funded by financial institutions, this Report
begins with a discussion of federal aid programs, which form the context for all PSLs,
regardless of provider.




A. THE BASICS OF STUDENT LOANS
FEDERAL STUDENT AID PROVIDES A CRITICAL CONTEXT FOR
UNDERSTANDING PSLS , WHICH WERE ORIGINALLY DESIGNED TO
SUPPLEMENT FEDERAL LOANS AND GRANTS.

Federal aid, in the form of loans, grants, and tax credits, makes up over two-thirds of
direct aid to all postsecondary students.6 This makes federal student aid far and away
the most significant (non-familial) source of direct financial support for postsecondary
students. PSLs make up less than 15% of total student debt outstanding as of January
1, 2012 and contributed less than 7% to the estimated $112 billion in total student
loans originated in 2010-2011.7




    9            PRIVATE STUDENT LOANS
Students and parents who wish to take advantage of any federal student aid program
must complete the Free Application for Federal Student Aid (“FAFSA”).8 Eighty
percent of families of dependent undergraduate students filed a FAFSA in 2010-2011.9
The Department of Education processes the FAFSA to determine the Expected
Family Contribution (“EFC”) which is the amount that the student and family are
expected to cover directly from their income, assets or other sources, including loans.
The Department of Education reports the student’s EFC to those schools that the
student has indicated interest in attending. The school calculates the student’s “Cost
of Attendance” - tuition, fees, books and other program charges, together with
expected costs for food and housing, transportation, and other necessary expenses of
the school year. Essentially, it is the student’s personal budget for the year. The
school deducts the EFC from the Cost of Attendance, and taking account of other,
non-Federal aid available, awards the student aid in the form of Federal Pell Grants,
work study, other grant aid, subsidized Stafford Loans, and Perkins Loans to defray
the difference. Unsubsidized Stafford Loans and PLUS Loans are also available.
Federal student loans are not based on traditional measures of consumer
creditworthiness such as past credit performance or ability to repay.a

The relationship of EFC to federal aid is critical to PSL borrowers: PSLs were
originally designed as one method to finance the EFC,10 and loan proceeds are
considered resources available for education funding. If a student borrows more than
the EFC, his or her overall federal aid can be recomputed and reduced and may even
be subject to recapture to the extent that it has already been disbursed.11

The Department of Education offers three loan products that can be used to finance
the EFC: the PLUS Loan (a loan to parents of undergraduates) and the Grad PLUS
Loan (made to graduate or professional students), both of which use a credit check to
determine borrower eligibility but not loan terms or conditions, and the unsubsidized
Stafford Loan, which is not credit-based. Each of these loans competes with PSLs.

In addition, because a student can elect to use a PSL in lieu of a subsidized Stafford
loan, in whole or in part, subsidized Stafford loans also compete with PSLs. Thus,
demand for PSLs is closely tied to federal loan program dollar limits and eligibility
requirements. Unsubsidized Stafford loans are now capped at $31,000 for
undergraduates (for four years),12 and have annual caps of $5,500 to $7,500, increasing
with years of education completed. Graduate and professional students may borrow
up to $138,500 in combined subsidized and unsubsidized Stafford loans.13 14 As
discussed below, while Stafford loans offer significant risk mitigation compared to
PSLs, more than 40% of PSL borrowers do not exhaust their Stafford loan eligibility.

In summary, for the vast majority of students who file a FAFSA, PSLs exist as part of
a mosaic of financial options that includes grants and federal debt. The college’s
financial aid office is responsible to award aid controlled by the school and then
“package” all the eligible financial aid and explain the EFC. The PSL should be a

a
  PLUS loans require borrowers to not have an adverse credit history, but this is a more
limited standard than traditional creditworthiness measures.


    10             PRIVATE STUDENT LOANS
consideration in a context that requires the coordination of the school’s financial aid
office. In that context, the PSL can be a useful tool in the education finance toolkit.




B. FINANCIAL INSTITUTIONS AND THEIR
PRODUCTS
Prior to 2010, most Stafford loans were funded by private lenders (financial
institutions, primarily banks), guaranteed by state or non-profit entities, and reinsured
by the federal government under the Federal Family Education Loan (“FFEL”)
program.15 Lenders also received supplemental payments under the FFEL Program.16
Because Stafford loans are awarded as part of a school financial aid package, the school
served as the gatekeeper in connecting students and lenders. Under Title IV of the
Higher Education Act, the Department policed the schools’ unbiased service as
gatekeepers, through the anti-inducement rules, which prohibited explicit quid pro quo
for the referral of a federal student loan.17

As a gatekeeper, the financial aid office could influence borrowers by referring
students to one or more sources of FFEL loans, and lenders sought to be included on
the school’s “preferred lender list.” One way a bank lender could distinguish itself in
the competition to be named in the preferred lender list at a school was to offer a
companion PSL that could also be awarded (or at least referred to) as part of the
financial aid package to pay the EFC. Making PSLs available to FFEL borrowers from
a school was not, until 2008, considered a violation of the anti-inducement rules.18

Prior to the lending boom period of 2005 – 2007, banks used the school financial aid
award as their most direct method of marketing through the “school channel,” as it
was called. As with the Stafford loans being originated at the same time, the PSL
lender would look to the school to review approved loans and “certify” that the
borrower was enrolled and that the loan did not exceed the EFC. As with Stafford
loans, PSL proceeds were directly disbursed to the school. In some cases, lenders even
used the same technology platforms to communicate with schools about FFELs and
PSLs.19

Thus, the creation of the PSL industry and its continued operation are intertwined with
the mechanics of the federal aid process. The PSL came into existence as an adjunct to
the federal student loan program, grew through federal student loan (FFEL) marketing
channels, and shared processing and control systems with FFEL loan programs.	
  20

PSLS ARE CREDIT-BASED PRODUCTS DESIGNED TO MIMIC KEY
PRODUCT FEATURES OF STAFFORD LOANS – WITH DISTINCTIONS
THAT ARE CRITICAL FOR CONSUMER AWARENESS AND RISK.

From a consumer’s perspective, Stafford loans and PSL products share many key
features, and this may cause confusion for consumers.21 Stafford loans do not require
the borrower to repay while still in school.22 Unsubsidized Stafford loans accumulate
interest while the student is enrolled in school, and this interest is added to the

    11            PRIVATE STUDENT LOANS
principal balance (capitalized). Stafford loans offer a six-month grace period after
graduation before payments begin. Stafford loans offer additional deferment of
payment upon return to school to complete a degree or conduct post-graduate study.
These features are found in all of the PSLs reviewed in this study.

However, there are important differences. Nearly all American students are eligible for
some form of federal student loan, without regard to traditional creditworthiness
criteria.23 In contrast, in the current market, most PSLs require at least one borrower
to be “creditworthy”: currently employed, having a minimum credit score and, in more
recent years, meeting other criteria such as a debt-to-income ratio.24 Many
undergraduates would not meet these requirements. Today, most PSLs for
undergraduates (and a large number of loans to graduate students) must be co-signed
by a creditworthy person.

A key distinction between federal student loans and many PSLs is interest rate risk.
Today all federal student loans have fixed rates. Most PSLs are variable-rate loans with
risk-based pricing, where pricing varies from consumer to consumer based upon an
assessment of the creditworthiness of the borrower. Appendix Figure 1 shows the
evolving mix of rate indices across the Sample Lender loan level data. Lenders have
typically used LIBORb and prime rate to govern PSLs. For undergraduates, some
lenders are now offering fixed rates that appear to compete with Stafford rates, but
these rates are comparable to Stafford rates only for students with the most
creditworthy co-signers. Less creditworthy borrowers are offered fixed rates much
higher than Stafford rates.25

While all Stafford borrowers are entitled to a single rate that may be reduced based on
financial need, the rates for PSL borrowers vary widely with their credit scores. In
terms of recent (December 31, 2011) offerings, the Sample Lenders reported low-end
variable rates of 2.98% to 3.55% and high end rates (those paid by those with the
worst credits) of 9.50% to 19.00%, with an average rate of 7.8%. These are initial rates
in a very low rate environment and could increase substantially if interest rates rise
generally. Fixed-rate risk-based pricing reported by Sample Lenders ranges from 3.4%
to 13.99%.26 The distributions of margins above the index rate are shown in
Appendix Figures 3 and 4. Margins increased after the financial crisis of 2008, but
have declined to some degree for most program types.

One final and critical difference between PSLs and the Stafford loans they emulate is
the risk associated with future employment and the ability to repay. Stafford loans
offer numerous adjustments for borrowers who have difficulty making payments.
Income-based repayment and income-contingent repayment allow payments to be
reduced, based on current income levels. Forbearance allows for a temporary
reduction or cessation of payments, potentially for many months at a time. Even for a
borrower who falls into default at 270 days past due, there are still programs to
rehabilitate (cure) the default or consolidate to take the loan out of default.27
Rehabilitation even results in an adjustment of the default notation in the consumer’s

b
    Please see Glossary for definitions of key terms and concepts, including LIBOR


      12             PRIVATE STUDENT LOANS
credit report.28 With the exception of short-term forbearance periods, PSLs generally
lack similar risk mitigation tools.

At 120 days past due, PSLs are generally placed in default and there are no current cure
programs that eliminate a record of default.29 Because PSL lenders currently require
co-signers in 90% of loans, the Stafford loan repayment flexibility tools arguably
should not be needed for PSLs. That is, Stafford loans do not control for ability to
pay at origination, and the law provides for adjustments for those who cannot pay after
separation from school. In contrast, if a PSL lender has already tested for ability to
repay, there should be fewer cases where borrowers ultimately are unable to pay. As
explained below, this may not be a correct assessment in all economic circumstances.

In summary, the PSL was designed to mimic a Stafford loan during school, but it has
key differences which create risks for consumers if the future path of interest rates, the
economy, and the labor market vary beyond initial expectations. If a significant
number of consumers still confuse the two, that confusion may cause long-lasting and
substantial consumer harm.

LENDER DATA CONFIRMS THAT PSL RISKS GENERALLY MAKE
STAFFORD LOANS A BETTER CHOICE FOR MOST CONSUMERS.

The general principles articulated in the preceding section are illustrated by the material
cost differentials and rate risks experienced by PSL borrowers in the Sample Lender
loan level data. PSLs have risk-based pricing, meaning that consumers are presented
with a range of possible rates before they apply. Only after the lender approves the
loan does the consumer receive a disclosure showing the actual, risk-based price for
that consumer.30 As shown in Figure 1 there can be a material difference in the initial
rate. The red line in Figure 1 is the current unsubsidized Stafford rate of 6.8%, in
effect since 2008.




    13            PRIVATE STUDENT LOANS
FIGURE 1: HISTORY OF INITIAL RATES FROM LOAN LEVEL DATA: MIN,
MAX, AND MEAN (SAMPLE LENDERS)




Source: Sample Lender loan level data

As illustrated in Figure 1, during this period it was possible to obtain an initial rate
below the unsubsidized Stafford level, but only borrowers with the most creditworthy
co-signers could do so. The mean borrower always started out above the fixed
Stafford rate. The initial rate on a variable rate loan is also subject to rate variation
risk. In today’s historically low rate environment, the most creditworthy borrowers
have temporarily won that gamble, as illustrated in Figure 2.

Figure 2 illustrates mean, maximum and minimum rates paid by Sample Lender loan
level borrowers on 2005 cohort loans.31




    14            PRIVATE STUDENT LOANS
FIGURE 2: ACTUAL RATES PAID BY 2005 COHORT BORROWERS,
MEAN, MINIMUM, AND MAXIMUM (SAMPLE LENDERS)




Source: Sample Lender loan level data

The current historically low rate environment is, however, an anomaly. A borrower
needs to understand the history of rate movement in order to evaluate rate risk on a
variable rate loan. In one standardized method of disclosing rate risk, The Truth in
Lending Act (“TILA”) requires the lender to show a 15-year history for a 15-year
home equity line of credit – illustrating what would have happened if the borrower had
taken out the loan 15 years prior to the present-day application. Figure 3, below,
applies the same methodology to hypothetical 20-year PSLs – using actual rate and
margin data for loans in the Sample Lender loan level database. We used 2011 Sample
Lender loan margin and historical LIBOR data to illustrate mean, minimum and
maximum rate histories for such loans. The Index is three-month LIBOR, one of
several common indices used for PSLs:




    15            PRIVATE STUDENT LOANS
FIGURE 3: HYPOTHETICAL RATES BASED ON HISTORICAL INTEREST
RATES AND 2011 MARGINS (1992- 2011)


                                                    20	
  Year	
  Hypothetical	
  Interest	
  Rates	
  Based	
  on	
  2011	
  Margins
                                                                                   1	
  month	
  LIBOR	
  as	
  Index
                        20.0%
                        15.0%
    Interest	
  Rate

                        10.0%
                        5.0%
                        0.0%




                            1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
          Note:	
  Bold	
  Red	
  Line	
  indicates 6.8%                    Mean             Minimum                    Maximum



Source: Sample Lender loan level data

As shown above, the strongest credits would have paid less than the Stafford rate, but
the average (mean) PSL borrower whose loan was governed by 2011 loan margins
would have never paid a lower rate than the Stafford rate. Perhaps more telling, those
borrowers who pay the highest rates under 2011 structures would have paid between
13% and 20% interest, based on historical rates.

In summary, when considering the marketing, disclosures, processing or other factors
that may influence a consumer choice of a PSL in lieu of a federal student loan, public
policy should emphasize the choice of a federal student loan. To be sure, there is a
relatively small subset of families who have the financial capacity to weather the
incremental risks presented by the PSL product. For a family with the financial
capacity to pre-pay a variable-rate PSL should rates rise, and with the ability to bear the
financial burden of the loan should the student’s future income not match
expectations, a PSL may, in some circumstances, be an appropriate substitute for an
unsubsidized Stafford loan.

THE FINANCIAL INSTITUTION PSL MARKET EXPERIENCED A BOOM
AND BUST CYCLE IN THE LAST DECADE, FACILITATED BY THE ASSET-
BACKED SECURITIES MARKET.c

c
 For an explanation of the securitization market and process, please see the entry on
“Asset-Backed Securitization” in the Student Loan Glossary at the end of this Report.


                       16                                  PRIVATE STUDENT LOANS
The financial institution PSL market grew rapidly over the last decade and just as
rapidly receded. According to the College Board, the financial institution market grew
from less than $5 billion in 2001 to over $20 billion in 2008, and then rapidly
contracted to less than $6 billion in 2011.32 The loan volume of the lenders in the
Sample Lender Portfolio shows a similar trend. Note that the Sample Lenders consist
of firms who weathered the market downturn and remained in business into 2012,
using deposits and other “on-balance sheet” funding sources33 in part during the
securitization and lending boom (2005 – 2007) d and predominantly after the financial
crisis. Figure 4 shows originations of PSLs by Sample Lenders by calendar year for
2005-2011:

FIGURE 4: ORIGINATION VOLUMES 2005 – 2011 ($B’S) (SAMPLE
LENDERS)


                                                                                      Private	
  Student	
  Loan	
  Volume	
  in	
  Billions	
  
                                                                                                                 as	
  reported	
  by	
  large	
  bank	
  lenders




                                                                                                                                                                10.1	
  
                                                                                                                            9.4	
  


                                                                                       7.8	
  
                                                                                                                                                                                                7.0	
  
                                                  6.6	
  

                                                                                                                                                                                                           5.6	
      5.7	
  



    Originations




                                               2005                                  2006                                 2007                                 2008                            2009       2010       2011

    Outstandings                                55.9                                  77.1                                101.1                                123.8                           133.0      136.7      140.2


    Note:	
  	
  Data on	
  Outstandings	
  gathered	
  from	
  the	
  sample	
  lenders	
  may	
  include	
  purchased	
  loans	
  not	
  included	
  in	
  loan	
  origination	
  data
    Note:	
  	
  Estimated	
  2011	
  market	
  size	
  when	
  including	
  other	
  lenders	
  not	
  in	
  sample:	
  $7	
  billion	
  (origination),	
  $150	
  billion	
  (outstanding)




Source: Sample Lender loan level data

A large portion of student loan volume during the boom was funded by asset-backed
securities (“ABS”). In this respect, the private student loan market resembled the
subprime mortgage market. During the boom, high investor demand for student loan


d
 In the course of examining the sample lender data, the Agencies found that pricing
began to rise and underwriting standards began to tighten in 3Q07 and accelerated
dramatically in 3Q08. Due to the seasonality of student lending and the common use of
multiple disbursement loans, our data tabulation reports a loan to be originated in the
period when loan proceeds were first disbursed. Because of these complexities, it is
difficult to pinpoint an exact moment when the “boom” period came to an end. For the
purposes of this Report, we have defined the end of the securitization and lending boom
period as occurring in 3Q07.


               17                                             PRIVATE STUDENT LOANS
ABS (“SLABS”) allowed SLABS issuers to create structures with very low
collateralization ratios.34 As a result of these factors, $100 in student loans could
generate immediate cash proceeds from securitization of $105 or more.35 Generally
speaking, the buyer assumed all of the risk that the borrower would fail to repay the
loan after such a transaction. Therefore, a PSL lender had an incentive to increase loan
volumes made for such a sale, with less incentive to assure the creditworthiness of
those loans.36 This dynamic provided the means and the incentive for PSL lenders
and SLABS issuers to originate and securitize greater and greater amounts of PSLs
between 2005 and 2007(see Figure 4 and Figure 5). As developments in the asset-
backed securities market in mid to late 2007 negatively impacted investor demand for
SLABS, 37 PSL originations slowed dramatically.38 As noted above, our Sample
Lenders are largely composed of banks who had the ability to house loans on their
balance sheets in the absence of the ABS market, thus the significant decline in PSL
originations for our sample occurred in 2009 as the financial crisis spread from the
“shadow banking system”39 into the traditional banking system.


FIGURE 5: PSL ABS ISSUANCE VOLUMES 2004 – 2011 - $ BILLIONS
(SOURCES BELOW)40




The ABS totals for 2009 and 2010 are inflated by the now-concluded TALF program
                                   41
(government-assisted transactions).

DEMAND CREATES SUPPLY: THE DIRECT-TO-CONSUMER CHANNEL
AND LOAN AMOUNTS.

During the lending boom, PSL lenders sought to increase volume through a new
marketing channel and processing protocol: Direct-to-Consumer (“DTC”). DTC

    18            PRIVATE STUDENT LOANS
lending circumvented the school’s financial aid office, marketing instead through mass
media, online advertising, and direct media.42 Funds were generally disbursed directly
to the student, instead of to the school. The school did not certify the borrower’s
financial need, and the lender instead imposed a cap of the lesser of total cost of
attendance or a fixed amount, such as $30,000.43 This new technique could
simultaneously increase the number of borrowers and the amount each one borrowed.
It also created an opportunity for the student to borrow more than the EFC.


FIGURE 6: SCHOOL CHANNEL VERSUS DTC ORIGINATIONS BY
PROGRAM BY CALENDAR YEAR (2005-2011)




Source: Sample Lender loan level data

Figure 6 illustrates the rapid growth of DTC lending and the retreat of school-channel
lending (and associated certification) during the boom years. By 2008, 27.8% of
undergraduate loans were school certified, down from 60.0% in 2005.44 The eligibility
for federal aid and the corresponding EFC, together with the school’s determination of
availability of scholarships and other non-federal aid are critical tools in determining
how much private debt makes sense for a borrower, both in terms of excessive future
loan payments and potentially jeopardizing federal aid. When separated from those
tools, some students rapidly increased the amount they borrowed during the DTC-
dominant years of 2005-2008. Figure 7 shows the average ratio, calculated at the
borrower level, of PSLs to annual tuition and fee expense, at the borrower’s school in
the year in question, for borrowers in the Sample Lender loan level data.45




    19            PRIVATE STUDENT LOANS
FIGURE 7: PSL BORROWING AS A % OF TUITION BY PROGRAM TYPE
(ACADEMIC YEAR) (SAMPLE LENDERS)



               Ratio of Total Loan Balances to Published Tuition and Fees
               by Academic Year
         2.0




         1.5




         1.0




         0.5




         0.0
                2004-2005
                            2005-2006
                                        2006-2007
                                                    2007-2008
                                                                2008-2009
                                                                            2009-2010
                                                                                        2010-2011

                                                                                                    2004-2005
                                                                                                                2005-2006
                                                                                                                            2006-2007
                                                                                                                                        2007-2008
                                                                                                                                                    2008-2009
                                                                                                                                                                2009-2010
                                                                                                                                                                            2010-2011

                                                                                                                                                                                        2004-2005
                                                                                                                                                                                                    2005-2006
                                                                                                                                                                                                                2006-2007
                                                                                                                                                                                                                            2007-2008
                                                                                                                                                                                                                                        2008-2009
                                                                                                                                                                                                                                                    2009-2010
                                                                                                                                                                                                                                                                2010-2011

                                                                                                                                                                                                                                                                            2004-2005
                                                                                                                                                                                                                                                                                        2005-2006
                                                                                                                                                                                                                                                                                                    2006-2007
                                                                                                                                                                                                                                                                                                                2007-2008
                                                                                                                                                                                                                                                                                                                            2008-2009
                                                                                                                                                                                                                                                                                                                                        2009-2010
                Undergraduate                                                                                     Graduate                                                                                Medical                                                                                        Law                                        2010-2011




Source: Lender loan level data, tuition and fees from IPEDS.
Matched on OPEID and student’s in-state status based on state reported to lender.
Sample restricted to borrowers whose schools could be matched to IPEDS by OPEID.

As Figure 6 and Figure 7 show, undergraduate loan amounts and school certification
of student need show a negative relationship. That is, loan amounts rose (as a
percentage of tuition) as school certification decreased, and decreased when schools
became involved again in later years, all in virtual lockstep. For medical and law
students, where schools always remained involved, there was no comparable pattern.46
Changes in undergraduate loan amounts could reflect changes in other aid or changes
in other family financing options, but the data does not support those hypotheses.

According to the College Board, 2005 – 2011 was not a period of dramatic decline of
uptake of other aid sources.47 In other words, students were still receiving grants and
loans from schools and the federal government at similar levels across the entire period
to cover their overall cost of education. Changes in other family resources also fail to
explain the spike in reliance on PSLs. During 2004-2007, PSL sizes grew, even though
families had not yet lost access to home equity lines of credit (“HELOCs”), cash-out
home equity refinance loans, and other financial products that could support
borrowing, as happened in the subsequent recession. In fact, if family income and
assets drove the size of PSLs, the decline in household resources during the recession

    20                                        PRIVATE STUDENT LOANS
would suggest that PSL amounts should have grown during the recession, when they
in fact declined after 2007.

There is reason to infer that the spike in loan amounts was driven primarily by changes
in the level of school monitoring of the loan process (due to a sidestepping of the
financial aid office with the rise in DTC lending). In addition, the dramatic increase in
individual annual loan amounts relative to tuition and fees reflects additive borrowing;
students were borrowing more from Direct-to-Consumer lenders while maintaining
other financial aid sources, that is, over-borrowing (borrowing more than the Expected
Family Contribution) when schools were not providing controls on loan amounts.
This comports with the fact that, absent school certification, lenders have no way of
knowing what other debt aid the student has already incurred for the academic year.
As school certification started to rebound in 2008, the proportion of total costs of
education that students funded through PSLs fell precipitously.

DEMAND CREATES SUPPLY, REVISITED: CREDIT STANDARDS WEAKEN
AS LOAN VOLUMES RISE.

During the securitization boom, the SLABS market was similar to the residential
mortgage-backed securities market in another respect: credit criteria. The demand for
PSL assets to fuel SLABS issuance provided incentives to increase approval rates by
lowering minimum credit scores and muted incentives to increase the percentage of
creditworthy borrowers in a loan pool. Figure 8 shows the weighted average FICO
scores of borrowers for loans in our sample, illustrating a general move to less
creditworthy borrowers during the securitization and lending boom. Figure 8 presents
FICO scores weighted by real original balances for educational loans, demonstrating
that weighted average FICOs from 2005 to 2011 varied by as much as 40-60 points as
credit standards first dipped and then, after the financial crisis, rapidly increased.




    21            PRIVATE STUDENT LOANS
FIGURE 8: WEIGHTED AVERAGE FICO SCORES BY CALENDAR YEAR
(SAMPLE LENDERS)


                           Weighted	
  Average	
  FICO	
  Score	
  for	
  Education	
  Loans	
  by	
  Year	
  of	
  Origination
                 	
  800
                 	
  750
 FICO	
  Score

                 	
  700
                 	
  650
                 	
  600




                               2005                     2006                   2007                  2008                      2009                 2010                          2011
                            Wtd	
  Avg	
  Max	
  FICO	
  w/	
  Co-­‐Borrower          Wtd	
  Avg	
  FICO	
  Borrower	
  Only          Wtd	
  Avg	
  Max	
  FICO	
  -­‐	
  All	
  Loans



Source: Sample Lender loan level data
The “weighted average max FICO” shows the average of the highest FICO where there are
                                            48
two or more borrowers with FICOs on a loan, the weighted average borrower-only FICO
shows the average of loans with only one signer, and “all loans” averages the two.

Figure 9, below, presents the change in educational loan volumes both as a proportion
of all loans and as counts of loans for borrowers in each of the deciles of FICO scores
for borrowers in the Sample Lender loan level data in 2005. During the boom years,
the lowest credit deciles were the most heavily populated. After the financial crisis, the
distribution reversed. Simply put, during the boom, lenders made a high percentage of
loans to weaker credits. Today, only a very good credit is likely to be approved:




                 22                          PRIVATE STUDENT LOANS
FIGURE 9: FICO DISTRIBUTION BY 2005 DECILES (SAMPLE LENDERS)




Source: Sample Lender loan level data

To summarize, during the SLABS boom the size of the PSL market doubled through a
combination of over-borrowing and a marked decline in credit standards. Both of
those trends created consumer risks at the same time that they created risks to lenders
(or the investors holding the loans); both consumers and creditors lose when loans
cannot be repaid.

DISLOCATION IN THE CAPITAL MARKETS CAUSES A SIGNIFICANT
CONTRACTION IN THE SECONDARY MARKET

As described in Figure 5, the SLABS market dropped to $1 billion in 2008. Excluding
government-assisted transactions, 2009 and 2010 volumes were $2.9 billion and $5.4
billion, respectively.49 In 2011, securitization levels declined to $3 billion. SLABS
transactions are no longer immediately profitable for lenders, meaning fewer lenders
rely on them as a funding source.50

Starting in 2008, as illustrated in Figure 10, banks and investors incurred sharply
increased defaults on loans made during the lending boom. The timing of these
defaults appears to track the recession, but the volume within cohorts may also be
related to over-borrowing and the level of subprime credits in cohorts like 2007.




    23            PRIVATE STUDENT LOANS
FIGURE 10: GROSS DEFAULTS BY TIME INCIDENCE – SAMPLE LENDER
PORTFOLIO (X AXIS IS CALENDAR YEAR)


                                   Defaulted	
  Loan	
  Balance	
  by	
  Vintage	
  Shown	
  by	
  Year	
  of	
  Incidence
                       	
  600
                       	
  500
                       	
  400
 $	
  in	
  Millions

                       	
  300
                       	
  200
                       	
  100
                       	
  -­‐




                                 2005           2006            2007             2008            2009            2010        2011
                                              2005       2006       2007      2008       2009      2010       2011

Source: Sample Lender loan level data




                       24               PRIVATE STUDENT LOANS
FIGURE 11: (BASED ON $’S) GROSS CUMULATIVE DEFAULT CURVES
BY ORIGINATION VINTAGE (2005-2009) BY YEARS OF SEASONING
(SAMPLE LENDERS)


                                                                    Gross	
  Cumulative	
  Defaulted	
  Loan	
  Balances	
  by	
  Origination	
  Vintage
                                                                                                            (by	
  Years	
  of	
  Seasoning)
                                                            12.0%
                                                            10.0%
 Percentage	
  of	
  Dollars	
  of	
  Loans	
  Defaulted


                                                            8.0%
                                                            6.0%
                                                            4.0%
                                                            2.0%
                                                            0.0%




                                                                    Year	
  1        Year	
  2          Year	
  3              Year	
  4          Year	
  5   Year	
  6   Year	
  7
                                                                                                 2005       2006            2007           2008      2009



Source: Sample Lender loan level data

The default curves for the 2005-2008 vintages in the Sample Lender Portfolio data
show increasing loss rates for each successive vintage, reflecting increasingly aggressive
underwriting. Notably the 2009-2010 vintages do not show the steep trajectories of
earlier years. The foregoing are data from the Sample Lender Portfolio. In reviewing
the portion of these loans that were securitized, the ABS analysts and the issuers
appear to agree that the credit quality of Direct-to-Consumer (i.e., not school-certified)
lending in 2005-2008 was materially worse than average.51 All of the ABS issues from
the issuers with large DTC percentages have been downgraded,52 meaning that the
agencies that rate the credit quality of the bonds have determined that the SLABS
backed by loans from those lenders have a relatively high risk of loss, because the
underlying loans have a relatively high risk of default compared to the assumptions
used when the bonds were originally issued.




                                                           25                   PRIVATE STUDENT LOANS
POST-CRISIS, LENDERS REPORT A FLIGHT TO QUALITY IN PSL
UNDERWRITING.

The sample lenders report in their qualitative description of underwriting changes that
they have taken a number of measures to improve credit quality since 2008. As
illustrated in Figure 12 and Figure 13, the proportion of loans that are co-signed has
increased over the sample period; by 2011, 90.5% of the dollar volume of educational
loans originated by the sample lenders was co-signed, compared to 55% in 2005.
Adding a co-signer provides a margin of safety for both lender and borrower. The
benefit to the lender is obvious. For the student borrower facing today’s difficult labor
market, a co-signer can provide a payment bridge if the student struggles financially.	
  

FIGURE 12: PERCENTAGE OF CO-SIGNED EDUCATION (NON-
CONSOLIDATION) LOANS FROM 2005 – 2011 (SAMPLE LENDERS)


                                                                   Percentage	
  of	
  Co-­‐Signed	
  Education	
  Loans	
  by	
  Year	
  of	
  Origination
                                                                                                    (Based	
  on	
  Loan	
  Dollars)
                                                           100%
                                                           90%
                                                           80%
                                                           70%
  Percentage	
  of	
  Loans	
  with	
  a	
  Co-­‐Signer

                                                           60%
                                                           50%
                                                           40%
                                                           30%
                                                           20%
                                                           10%
                                                           0%




                                                                  2005           2006            2007                  2008            2009      2010         2011


Source: Sample Lender loan level data




                                                          26         PRIVATE STUDENT LOANS
FIGURE 13: PROPORTION OF LOANS WITH CO-BORROWERS BY
PROGRAM TYPE




Source: Sample Lender loan level data

With respect to increases in the level of co-signing, lenders were seeking to mitigate
risk as they expanded access to credit throughout the reporting period; however, we
note that this trend accelerated between 2008 and 2009, as falling investor demand for
SLABS both reduced the size of the PSL market and forced lenders to retain the bulk
of their production for their own loan portfolios.

In addition, mean FICOs have increased and the distribution now shows peaks in the
upper credit tiers and relatively few low score loans. See Figures 8 and 9, above.
School certification is now at its highest level since the beginning of the Sample Lender
Origination dataset (see Figure 6). Lenders also report returning to the practice of
disbursing funds to schools instead of to borrowers.

To summarize, the Sample Lender Portfolio and loan-level data illustrate a credit boom
that led to lax underwriting standards on a number of dimensions and a bust that has
led to a significant tightening of those underwriting standards.

THE CURRENT STATE OF PRODUCT TERMS: INCREASED RATE RISK
AND INCREASED REGULATION OF INFORMATION PROVIDED BY
SCHOOLS.

The historical interest rates of PSLs and the margin over variable rate indices are
shown in Appendix Figures 2, 3 and 4. Appendix Figure 2 shows initial interest rates
moving up with the credit crisis in 2007-2008, for all education programs, and down
with the general rate environment in 2009. As lenders sought out primarily excellent
credit from co-signers, the range from high to low rates contracted. Tellingly,


    27            PRIVATE STUDENT LOANS
Appendix Figures 3 and 4 show that margins (which are added to the index to produce
the variable rate) increased rapidly in 2007-2008, but did not subsequently decline as
much as initial rates declined. As shown in Appendix Figure 4, the persistence of
higher margins is not attributable to lenders changing the overall mix of index rates,
but to an increase in margins added to each index rate. To a significant degree, the
recent reduction in initial variable rates advertised by PSL lenders is more a factor of
today’s extremely low general interest rate environment than it is of loan terms
returning to pre-crisis levels.53 Today’s PSLs have more embedded (and asymmetrice)
rate risk than PSLs in 2005. Figure 3, above, shows the combined effect of rate
variation over time and the relatively high margins currently used to compute variable
rates. Even in the current extremely low rate environment, only the best credits
receive PSLs with rates below the unsubsidized Stafford interest rate.

Marketing channels for PSLs have also changed, possibly due in part to changes in
laws and regulations. The return to school-certified lending has not been paralleled by
a return to school sourcing of borrowers. Many lenders continue to find borrowers
through direct marketing to existing banking customers, involving the school only after
loan approval, to verify financial need.54

Schools are well-positioned to influence financial decision-making by students. This
has often attracted scrutiny from the public and regulators. For example, many
financial institutions arrange marketing partnerships with schools to attract students to
credit card, deposit account, and financial aid disbursement card products. Financial
institutions have also pursued arrangements to attract borrowers for PSL products.

Prior to the changes to the Higher Education Act under the Higher Education
Opportunity Act of 2008 (“HEOA”) and subsequent Department of Education
regulations, there were numerous reports of inappropriate relationships between
schools and lenders that reflected inducements given to, and in some cases solicited by,
schools for placement on an institution’s preferred lender list. These relationships were
exposed in investigations by the New York Attorney General and the United States
Senate. Documentation of these practices obtained through these investigations
reflected direct compensation to institutions, travel and accommodation for “advisory
board” meetings hosted by lenders, and school financial aid officials receiving stock
and stock options from lenders on the preferred lender list. The Investigations by the
Iowa Attorney General also revealed that its state-affiliated PSL provider
inappropriately steered students towards higher cost loan products, and provided
payments to participating colleges encouraging use of their PSL product.55

 A number of Public Commenters suggest that provisions of the HEOA imposed
excessive restrictions on schools who choose to provide information about PSLs to
students or parents. These changes established code-of-conduct requirements relating
to the selection of “preferred lenders” (including imposing quasi-fiduciary duties) and
required the postsecondary institution to provide disclosures designed to ensure, if the


e
  As interest rates cannot become negative, and generally PSL notes have no rate caps,
interest rates can potentially increase more than they can decrease.


    28            PRIVATE STUDENT LOANS
school chooses to refer students to a lender, that students and families have the
information to determine whether the institution conducted a fair selection process
that was free from conflicts of interest.56 Comments from schools, lenders and
advocacy groups all noted that a majority of schools are concerned about
recommending lenders under the preferred lender rules, and many refuse to provide
any information about PSLs.57 Many school commenters complained of the burden of
the regulations and stated that students receive less information about lending options
as a result of the rules. The public commenters, however, have not suggested
alternative safeguards to avoid repetition of those inappropriate relationships and
associated market failures that would be less restrictive than current marketing rules.

In addition to complaints about the rigors of the new “preferred lender list” rules,
schools also expressed concern that the 2008 law changes interfere with delivery of
federal loan options that may not be viewed by the public as “private student loans,”
even though they are defined in the statute as such. Under the 2008 amendment to
TILA, the term “private student loan” includes any loan not made or insured under
Title IV of the HEA, such as health professions loans administered by the Department
of Health and Human Services. 58 As a result, preferred lender list requirements and
special TILA disclosures even apply to some loan programs established by Congress.
The result is confusing disclosures and an added burden on schools to deliver another
federal loan program. For example, the special disclosures for federal health
professions loans include several admonitions to exhaust federal loan options first
(before taking a federal loan).59

To summarize, PSLs (offered by financial institutions) have become more risky with
respect to interest rates and many schools have reported that they find it more difficult
to provide information about PSLs under current statutory requirements.




C. NON-BANK PSL PROVIDERS
As explained at the beginning of this Report, for-profit (bank) lenders make up $6
billion of today’s $7.9 billion PSL market. The balance is provided by state-affiliated
non-profit lenders and by the schools themselves (directly or through school-
supported investment funds).

NON-PROFIT, STATE-AFFILIATED LENDERS GREW DURING THE
SECURITIZATION BOOM AND CAPITAL MARKETS RESTRICTIONS HAVE
SINCE CUT THEIR VOLUME.

Ten state-affiliated non-profit private loan providers volunteered to provide data for
this study. These lenders provide approximately $950 million annually in loans for
residents of their states and out-of-state students attending in-state schools. The state
program providers report that their loans are distinguished from for-profit lenders in a
number of ways, including lower, fixed rates derived from tax-advantaged bond
funding, lack of risk-based pricing, substantial financial counseling before and after



    29            PRIVATE STUDENT LOANS
borrowing, and 100% school certification. To learn more about these loans, the
Agencies obtained voluntary submission of data from state-affiliated lenders.

Non-profit lenders submitted loan origination volume history set forth below in Table
1. The Agencies believe this sample to be representative of approximately 50-60% of
the aggregate size of the non-profit, state-affiliated loan market.


TABLE 1: SELF-REPORTED LOAN VOLUMES OF STATE-AFFILIATED
NON-PROFIT LENDERS


Sample of Non-Profit/State-Affiliated Private Student Loan Originations by Academic Year
Dollars in Millions



   2005-2006             2006-2007            2007-2008            2008-2009               2009-2010   2010-2011


   $533.9                $764.9              $1,005.7              $584.0                  $552.2      $600.6

Source: State Lender data

As evidenced by the table above, non-profit, state-affiliated programs experienced a
significant curtailment in originations beginning with the 2008-2009 academic-year
cohort; originations fell 39% between 2008 and 2009. Growth returned in the 2010-
2011 academic year. Because the nature of the data available for this set of lenders
differs from that of the financial institution lenders from both a qualitative and
quantitative perspective, it is difficult to draw conclusions about the causes for such
declines and growth.

Similar to financial institutions, non-profit state-affiliated lenders leveraged the
availability of capital in the secondary markets, specifically by issuing SLABS.60 While
the structures of the financing vehicles utilized by non-profit lenders during the boom
years differed slightly from for-profit structures (i.e. revenue bonds versus
senior/subordinate tranches of taxable debt), non-profit, state-affiliated lenders were
impacted by the lack of investor demand for SLABS as well.61 Most of the student
loan backed bonds issued by non-profit, state-affiliated lenders are tax exempt and
therefore have a funding advantage over for-profit SLABS securities for certain
investors, but even tax-advantaged investments were curtailed during the financial
crisis of 2008.

NON-PROFIT, STATE-AFFILIATED LENDERS CLAIM TO PROVIDE A
LOWER-RISK, MORE CONSUMER-FRIENDLY PRODUCT, AND THE
LIMITED AVAILABLE FACTS APPEAR TO SUPPORT THESE CLAIMS

Non-profit, state-affiliated lenders claim to achieve lower risk to consumers due to
consumer education, not using risk-based pricing, using fixed rates in most cases,
providing more repayment options, requiring all loans to be school certified, and

    30            PRIVATE STUDENT LOANS
having a general mission to benefit the public. One non-profit, state-affiliated lender’s
Public Comment included detailed information about online financial counseling
required to be completed by borrowers and their co-signers prior to even applying for
a loan. The lender reported that a significant number of borrowers who completed the
counseling reduced their loan amount request.

Five state-affiliated lenders provided extensive historical loan interest rate data. Every
lender had a long history of offering single fixed-rate products, without using risk-
based price tiers. Using a single interest rate, for borrowers with a range of credit
characteristics, averages credit risk across all borrowers and gives borrowers with
weaker credit lower pricing than they would receive in an individual risk-based pricing
regime. Interest rates prior to the financial crisis ranged from 6.0% to 7.5%. After the
crisis, more stringent credit and funding requirements in the ABS market increased
prices by approximately 200 basis points.

Default rates for non-profit, state-affiliated lenders in our data set are approximately
half that of their for-profit market counterparts in our Sample Lender loan level
database. Underwriting data from a portion of our sample suggests that more careful
underwriting (relative to financial institution lenders) reduced default rates. Figure 14,
below, shows the lifetime gross cumulative loss curves from 1997 through 2010 for a
select group of lenders who submitted their loan performance data for this study.
Non-profit lenders also exhibit much higher recovery rates on defaulted loans,
reflecting both conservative credit underwriting and special collection tools available to
some (such as garnishing state tax refunds). Figure 14 shows data for loans going into
repayment for five lenders who elected to provide data.




    31            PRIVATE STUDENT LOANS
FIGURE 14: GROSS CUMULATIVE DEFAULTED DOLLAR CURVES BY
REPAYMENT ENTRY VINTAGE (1997-2010) BY YEARS OF SEASONING
FOR FIVE NON-PROFIT LENDERS


                                                         Gross	
  Cumulative	
  Losses	
  by	
  Repayment	
  Vintage
                         7.00%
                         6.00%
                         5.00%
                         4.00%
  Default	
  Rate


                         3.00%
                         2.00%
                         1.00%
                         0.00%




                                 Year	
  1 Year	
  2 Year	
  3 Year	
  4 Year	
  5 Year	
  6 Year	
  7 Year	
  8 Year	
  9 Year	
  10 Year	
  11 Year	
  12 Year	
  13 Year	
  14 Year	
  15

                         1997        1998         1999        2000        2001        2002        2003        2004        2005        2006        2007         2008        2009        2010




Source: State Lender data
Please note that the data presented above is reported on a different basis than the
financial institution lender loss curves presented in Figure 11. The above data is
presented by year of repayment entry, not year of origination.

The Agencies were unable to obtain comprehensive data regarding default avoidance
and cure options available to borrowers under the state-affiliated programs. As noted
above, federal student loans provide comprehensive borrower protection through
repayment options both before and after default. In response to questions on this
issue, some state-affiliated lenders indicated that capital markets funding for their loans
limited their flexibility in providing repayment protections to borrowers.




                    32                     PRIVATE STUDENT LOANS
INSTITUTIONAL LENDING
LITTLE IS KNOWN ABOUT INSTITUTION-FUNDED LENDING AT NON-
PROFIT SCHOOLS.

There is very little verifiable quantitative data about PSLs made directly by schools.
According to the College Board, total institutional loan volume is estimated to be
approximately $720 million in the 2010-2011 academic year, as compared to $500
million in the 2007-2008 academic year.

Public Comments paint a consistent picture of institutional lending. Many schools
offer payment plans to spread out costs over 12 months.62 Many institutional loan
programs are designed to emulate the Perkins Loan program, which are federally
financed loans offered through and originated by schools.

Perkins loans have a low fixed rate and an interest subsidy during enrollment.
Institutional loans are usually loans of last resort, offered when the student has
exhausted all other sources. As such, institutional loans are not based on ability to
repay – a creditworthy student would be sent to a bank. The Agencies were not able
to verify these assertions, but note that the approximately 2,000 consumer Public
Comments do not contain significant evidence that would give rise to a concern about
institutional lending by non-profit private or public colleges and universities.

PSL LENDING AT FOR-PROFIT SCHOOLS HAS MOVED FROM BANK
FUNDING TO SCHOOL FUNDING, AND SHOWS EVIDENCE OF RISK
ASSOCIATED WITH THAT SHIFT.

Proprietary, or for-profit, college institutional loans deserve separate discussion. As
shown in Table 6, in Part Two, students at for-profit schools add PSLs to their debt
mix at roughly twice the rate of students in comparable non-profit programs. For
example, in 2007-2008 46% of students at for-profit 4-year schools borrowed a PSL,
compared to 25% of students at private non-profit 4-year schools. However, private
student loan availability for proprietary school programs was significantly reduced (on
a percentage basis) during and after the financial crisis of 2008, more significantly than
other school types.63

Many lenders pulled back from the proprietary sector due to the perceived risk of
making loans to students in these schools/programs.64 Indeed, empirical evidence
from some lenders points to students at proprietary colleges having lower completion
and graduation rates, as well as increased rates of default on private student loans (and
federal student loans, too).65 When bank-funded private student loans became
unavailable to students at for-profit schools, some proprietary programs began lending
directly to their students in response. According to SEC filings for select publicly
traded for-profit education providers, some of these schools have turned to third party
administered private student loan programs.66 In some of these third party
arrangements, the school provides credit enhancement to one or more lenders. In one
instance, a school provides credit enhancement to a trust that purchases loans
specifically for only this school. The school buys the subordinated bonds issued by the


    33            PRIVATE STUDENT LOANS
trust and, in addition, explicitly guarantees the principal obligations of the senior bonds
of the trust.67 Public filings by these for-profit schools suggest they anticipate losses
resulting from default rates on these quasi-institutional loans that are significantly
higher than those experienced in bank or non-profit PSL programs. For example,
Corinthian Colleges Inc. reported on its fourth quarter 2009 earnings call that it would
have to discount its institutional loans by 55 percent.68




    34            PRIVATE STUDENT LOANS
Part Two: Borrower
Characteristics and
Behaviors

PSL BORROWERS AND THEIR REPAYMENT
BEHAVIORS
In response to Congress’ mandate in the Act, the Agencies compiled information on
the characteristics of PSL borrowers and on the repayment behavior of former
students who were PSL borrowers. Many of the findings below are in accord with
what might be expected; in general, student borrowers are young and come from
families that are not wealthy.

Information on borrower characteristics comes from the 2008 and 2004 iterations of
the National Postsecondary Student Aid Study (NPSAS:08 and NPSAS:04), a
nationally representative survey of postsecondary students, including graduate and
first-professional69 students, conducted approximately every four years. Information
on repayment behavior and employment comes from the 2004/2009 Beginning
Postsecondary Students Longitudinal Study (BPS:04/09), a longitudinal survey that
follows a subset of NPSAS respondents who began their postsecondary education
during the 2003-2004 academic year. These datasets bring together detailed
administrative and survey data in a longitudinal context.




    35            PRIVATE STUDENT LOANS
KEY FINDINGS ABOUT PSLS BORROWING IN THE 2007-2008
ACADEMIC YEAR INCLUDE:


                                      14% OF UNDERGRADUATES HAD PSLS, COMPARED TO
  14%                                 ONLY 5% THAT HAD PSLS IN THE 2003-2004 ACADEMIC YEAR.70
               5%
 2007-2008   2003-2004




  11%
                                      11% OF GRADUATE AND FIRST-PROFESSIONAL STUDENTS
 2007-2008                            USE PSLS.71




39% OF UNDERGRADUATE STUDENTS HAD A PRIVATE OR
NON-PRIVATE STUDENT LOAN.




OF UNDERGRADUATES WHO HAD EDUCATIONAL LOANS,                  90% HAD A FEDERAL LOAN.            72




MOST UNDERGRADUATE PSL BORROWERS ALSO APPLIED FOR FEDERAL FINANCIAL AID;

12% DID NOT APPLY.               73




AMONG DEPENDENT UNDERGRADUATES WHO HAD PSLS,
PSL amounts were higher for individuals in higher family income quartiles. Individuals in the lowest
quartile had average PSL loan amounts of $5,643 while individuals in the top quartile had average
PSL loan amounts of $9,299.74




    36              PRIVATE STUDENT LOANS
PSL USAGE WAS MORE PREVALENT AMONG STUDENTS AT FOR-PROFIT SCHOOLS THAN
AMONG THOSE WHO ATTENDED PUBLIC OR PRIVATE, NON-PROFIT SCHOOLS.


   For-Profit            Public         Private


                                                  AT TWO-YEAR SCHOOLS,
                                                  42% of students attending for-profit

  $                                               institutions had PSLs, while 5% of students
                                                  at public institutions had PSLs and at
                                                  private, not-for-profit institutions, 18% of
                                                  students had PSLs. At for-profit two-year

 42% 5% 18%                                       institutions, 96% of students who had PSLs
                                                  also had federal loans.




                                                  AT FOUR YEAR SCHOOLS,
  $                                               46% of students at for-profit institutions
                                                  had PSLs, compared to 9% of students at
                                                  public institutions and 25% of students at
                                                  private not-for-profit institutions. At for-
 46% 9% 25%                                       profit four-year institutions, 97% of
                                                  students with PSLs also had federal loans.75




  37            PRIVATE STUDENT LOANS
KEY FINDINGS ABOUT THE 2009 REPAYMENT BEHAVIOR AND
EMPLOYMENT STATUS OF PSL BORROWERS WHO ENTERED
POSTSECONDARY EDUCATION IN 2003-2004 INCLUDE:


63% had total monthly student loan payments (for both private and non-private loans) that were
less than 5% of their monthly income and

80% have monthly student loan payments less than 10% of their income.
5% had monthly student loan payments of 25% or more of their monthly income.                  76
                                                                                                   That group
increased to ten percent for graduates who attained a bachelor’s degree.

Among PSL borrowers who also had federal loans, a higher proportion of individuals who started their
postsecondary education at 2-year for profit institutions (18%) defaulted on their PSLs than those who started at
                                 77
2-year public institutions (5%).



THE UNEMPLOYMENT RATE AMONG PSL BORROWERS WAS 16%; FOR PSL BORROWERS
WHO ATTAINED A BACHELOR DEGREE THE UNEMPLOYMENT RATE WAS 11%.                                      78




Mean incomes in 2009 did not differ significantly between PSL borrowers and individuals who were
not PSL borrowers but who were part of the same student cohort. This held within levels of
educational attainment, as well as by type of institution first attended.




PREVALENCE OF PSL BORROWING

Table 2 shows the share of undergraduates that used PSLs in the 2007-2008 academic
year. It shows that 14% of undergraduates had for-profit private student loans and less
than 1% had either institutional or state loans. The majority of students who borrow
have federal loans:79 of the 39% of undergraduates who had an educational loan in the
2007-2008 academic year, 90% had a federal loan.80 Also, as shown in Table 6 below,
exclusive use of PSLs as a source of borrowing is uncommon; 4% of undergraduates
have PSL as their only form of borrowing in the 2007-2008 academic year. More
students used a combination of federal and private loans: 11% of undergraduates used
both PSLs and federal loans in the same academic year.




    38            PRIVATE STUDENT LOANS
 TABLE 2: PRIVATE LOAN USAGE BY UNDERGRADUATES, 2007-2008
 ACADEMIC YEAR


                                       Private Loans        Institutional Loans          State Loans
                                                 (%)                        (%)                  (%)
 Total                                           14.2                        0.5                  0.4
                                               (0.20)                     (0.09)               (0.03)
 Institution Type
      Public                                       8.7                       0.3                  0.4
                                                (0.17)                    (0.05)               (0.03)
     Private Not-for-Profit                       24.3                       1.1                  0.7
                                                (0.54)                    (0.16)               (0.11)
     Private For-Profit                           42.5                       1.2                  0.1
                                                (1.17)                    (0.76)               (0.04)




 Source: NPSAS 2008.
 Standard errors in parentheses.
 The names of the variables used in this table are: CONTROL, STLNAMT, PRIVLOAN and INLNAMT.
 The weight variable used in this table is WTA000.



Consistent with the increase in PSL loan originations from 2005-2008 in the sample
lender loan-level data, the share of undergraduates and graduate students who have
PSLs is statistically significantly higher81 82 in the 2007-2008 academic year than in the
2003-2004 academic year. Tables 2 and 4 show that 14% of undergraduates used PSLs
in 2007-2008, compared to 5% in 2003-2004.83 For graduate students the percentages
were 11% and 7%, respectively, as shown in Table 3. 84 In contrast, among first
professional students, use of private student loans was significantly higher in 2003-
2004 than 2007-2008,85 which is consistent with the timing of the increase in federal
loan limits for first-professional students to $20,500 as of July 1, 2007 in the Higher
Education Reconciliation Act of 2005 (P.L. 109-171).




    39              PRIVATE STUDENT LOANS
TABLE 3: GRADUATE STUDENT PARTICIPATION IN LOAN PRODUCT TYPES , 2007-2008
ACADEMIC YEAR AND 2003-2004 ACADEMIC YEAR


                                      2007-2008 Academic Year                         2003-2004 Academic Year
                                                                                                       Both
                                                                                                      Non-
                                            Non-     Both Non-                             Non-      Private
                            Private        Private   Private and            Private       Private       and
                             Loans          Loans        Private     No      Loans         Loans     Private
                              Only           Only         Loans    Loans      Only          Only      Loans No Loans
                               (%)            (%)            (%)     (%)       (%)           (%)        (%)      (%)

Total                           3.5           32.0           7.2     57.3       1.7         32.9        5.4      60.0
                             (0.29)         (0.50)        (0.49)   (0.30)    (0.18)       (0.96)     (0.46)    (1.16)

Master's Degree                 3.9           32.1           7.5     56.4       1.9         32.7        3.6      61.7
                             (0.42)         (0.80)        (0.77)   (0.60)    (0.25)       (1.31)     (0.47)    (1.46)
Doctoral Degree                 2.0           24.5           5.2     68.2       1.3         23.3        3.6      71.7
                             (0.41)         (1.26)        (1.36)   (1.49)    (0.28)       (1.49)     (0.49)    (1.49)
First-Professional              1.7           63.1          13.9     21.3       2.1         51.9       20.7      25.4
Degree                       (0.41)         (2.24)        (0.91)   (1.65)    (0.45)       (2.13)     (2.10)    (1.84)
Post-BA or Post-                4.4           21.2           4.4     70.0       0.7         27.7        1.7      69.9
Master's Certificate         (1.34)         (2.39)        (1.14)   (3.03)    (0.50)       (5.05)     (0.66)    (4.71)
Not in a Degree                 4.0           13.2           1.8     81.0       1.1         25.4        1.6      72.0
Program                      (2.25)         (2.12)        (0.44)   (3.27)    (0.35)       (4.05)     (0.68)    (4.18)
Source: NPSAS 2008 and NPSAS 2004.
The names of the variables used in this table are: PRIVPACK and GRADDEG.
The weight variable used in this table is WTA000.

Standard errors in parentheses.




    40                 PRIVATE STUDENT LOANS
CHARACTERISTICS OF UNDERGRADUATE
BORROWERS

This section describes the characteristics of undergraduate borrowers of PSLs and
non-private student loans. When considering the results in this subsection it is
important to note that these are “univariate” statistics; they do not take into account
factors that may explain differences between groups, such as differences in average
income between students whose parents have different educational attainment.




DEMOGRAPHIC CHARACTERISTICS
Table 4 shows undergraduate loan usage by demographic characteristics.

GENDER
The proportion of men and women who have a combination of federal and private
student loans is around 10%, and while there is a small but statistically significant
higher proportion of women (11%) who have a combination of private and non-
private loans than men (10%);86 this difference is not economically significant. There
is also no significant difference between the proportion of men and women who have
only PSLs.87

AGE
PSL usage is highest amongst students aged 19-29. While estimates of exclusive PSL
usage are below 5% for all age groups in 2007-2008, it is more prevalent among
individuals in the 19 to 23 year old age range (colloquially referred to as traditional age
college students) and those in the 24 to 29 year old age range.88 For these two groups,
the percentage of students who use PSL exclusively is 4%. Similarly, usage of a
combination of PSL and non-private loans is higher among students age 19 to 23 and
age 24 to 29 versus students 18 or younger and students 40 and older, and the
difference between the proportion of students who use a combination of PSLs and
non-private loans in the 19 to 23 age range and the 24 to 29 age range is not
statistically significant.89

RACE
In the 2007-2008 academic year, although the frequency of the exclusive use of private
student loans does not vary by racial group, a higher percentage of African Americans
(14%) use a combination of federal and private loans than all other racial groups.90 As
a point of comparison, 11% of whites use a combination of PSLs and non-private
loans as do 5% of Asians, the group with the lowest usage of a combination of PSL
and non-private loans.91 This pattern did not hold in 2003-2004, when the proportion
of white students with a combination of private and federal loans (4%) was statistically
significantly higher than the proportion of African Americans (3%).92




    41             PRIVATE STUDENT LOANS
FAMILY CHARACTERISTICS
Table 5 shows loan usage by family characteristics, including parental education,
Census region of permanent residence, dependency status, and family income.

DEPENDENCY STATUS
PSL usage is significantly lower among independent students than dependent students,
although the differences may not be considered large in magnitude: 3% of independent
students use PSLs exclusively versus 4% of dependent students,93 and 10% of
independent students use a combination of PSL and non-private loans versus 11% of
dependent students.94 When considering these results, one should keep in mind that
this does not account for age, attendance intensity, or parental status.


REGION OF PERMANENT RESIDENCE
Private student loan usage varies by Census region of permanent residence: 20.2% of
students whose permanent residence is in the Northeast utilize PSLs while 9.6% of
students from the West have PSLs (the lowest proportion by region), and this
difference is statistically significant.95


PARENTAL EDUCATION
Parental education may affect use of PSLs and other loan products for a variety of
reasons, including parental awareness of federal aid programs from their own college
experiences, higher willingness-to-pay for education, and higher incomes due to higher
education which may lead to more available income and savings to finance education.
Private student loan borrowing is less prevalent among students whose parents have a
bachelor’s degree or post-graduate degree than other groups, and is less prevalent for
students whose parents have post-graduate degrees than students whose parents have
only bachelor’s degrees.96

With regards to the use of PSLs, Table 5 shows that there is no significant difference in
exclusive PSL usage by parental educational attainment.97 The proportion of students
who use a combination of PSL and non-private loans does not differ significantly for
individuals whose parents’ highest level of educational attainment is high school or
less, college attendance without attaining a degree, an associate’s degree, or vocational
training.98 The proportion of students who have a combination of PSL and non-
private loans whose parents have a bachelor’s degree is significantly lower than for
students whose parents have a high school degree or less99 or an associate’s degree,100
and not significantly lower than for students whose parents attended college but who
do not have a degree.101 The proportion of students who have private and non-private
loans whose parents have post-graduate degree is lower than for all other groups.102

PARENTAL INCOME
The incidence of PSL borrowing, which is calculated by summing the column of
students who only have private loans and the column of students who have both
private and non-private loans, varies by parental income, and is highest in the middle
two quartiles of the income distribution: 15% in the 2nd quartile and 16% in the 3rd


    42            PRIVATE STUDENT LOANS
quartile, versus 14% in the lowest quartile and 11% in the top quartile.103 Figure 15
presents loan amounts by income quartile for students who have loans in the specified
categories, restricted to borrowers who were dependents in the 2007-2008 academic
year. In the figure, PLUS loans are considered federal loans. The results in Figure 15
demonstrate that loan amounts are higher in higher income quartiles for dependent
students for both PSL and federal loans. When considering these results, it is
important to take into account that subsidized Stafford loan limits decrease as family
income increases, which may explain why the average subsidized Stafford loan amount
does not increase across income quartiles.

SCHOOL AND PROGRAM CHARACTERISTICS
Table 6 shows use of particular loan types by school and program characteristics
including type of institution attended, attendance intensity, and program type.

TYPE OF INSTITUTION
Usage of PSLs is more prevalent for students at for-profit schools in the 2007-2008
academic year than at non-profit schools with comparable program length, and this
difference is statistically significant. At two year schools, 42% of students attending
for-profit institutions have PSLs, compared to 5% at public institutions and 18% at
private not-for-profit schools.104 Similarly, at four year schools, 46% of students at
for-profit institutions have PSLs, while 14% of students at public institutions have
PSLs and 25% of students at private not-for-profit schools have PSLs.105 Also, 34% of
students enrolled in less-than-two-year for-profit institutions have PSLs, while 16% of
students enrolled at private not-for-profit less-than-two-year institutions have PSLs.106
Note that the majority of students who have PSLs at for-profits also have federal
loans: 97% of students at two-year for-profit institutions and 96% of students at four-
year for profits who have PSLs also have federal loans.107 As discussed above, for-
profit PSL lenders severely curtailed lending to students at for-profit schools after
2007-2008, when the last NPSAS study was conducted, which may affect usage
reported in NPSAS:12




ATTENDANCE INTENSITY
Borrowing patterns also vary by attendance intensity. Students who are exclusively
part time use PSLs at a lower rate than students who are exclusively full time: 19%
versus 7%.108 Among student loan borrowers, the proportion with a PSL is
approximately 37% for both groups.109 Some of the differences in the frequency of
borrowing between the two groups could be affected by eligibility criteria for federal
loan programs and underwriting and pricing practices for PSLs.

PROGRAM TYPE
Students’ use of PSLs differs by program type. Students in associate’s degree programs
are less likely than bachelor’s degree candidates to have PSLs: 9% and 19%,
respectively.110 Note that this includes both full-time and part-time students, and
attendance intensity may vary by program length. Also, 21% of students in certificate
programs use PSLs.111

    43            PRIVATE STUDENT LOANS
TABLE 4: UNDERGRADUATE STUDENT PARTICIPATION IN LOAN PRODUCT TYPES , BY
DEMOGRAPHIC CHARACTERISTICS (2007-2008 AND 2003-2004 ACADEMIC YEARS)


                                            Academic Year 2007-2008                   Academic Year 2003-2004
                                                             Both                                      Both
                                                             Non-                                      Non-
                                                 Non-      Private                         Non-      Private
                                     Private    Private       and              Private    Private       and
                                      Loans      Loans     Private      No      Loans      Loans     Private      No
                                       Only       Only      Loans     Loans      Only       Only      Loans     Loans
                                        (%)        (%)        (%)       (%)       (%)        (%)        (%)       (%)

            All Students                 3.6       24.5       10.6      61.3       1.1       29.1        3.9      65.9
                                      (0.09)     (0.19)     (0.16)    (0.24)    (0.18)     (0.04)     (0.17)    (0.14)

Gender       Male                        3.7       21.8        9.5      65.0       1.2       27.3        4.1      67.4
                                      (0.17)     (0.33)     (0.20)    (0.45)    (0.08)     (0.38)     (0.25)    (0.50)
             Female                      3.5       26.6       11.4      58.5       1.0       30.4        3.7      64.8
                                      (0.10)     (0.27)     (0.25)    (0.26)    (0.05)     (0.26)     (0.12)    (0.25)
Age (As of 12/31)
             18 or Younger               2.3       27.8        9.2      60.7       0.8       30.7        5.3      63.2
                                      (0.20)     (0.66)     (0.42)     (0.8)    (0.10)     (0.77)     (0.30)    (0.93)
             19-23                       4.1       25.1       11.4      59.4       1.4       31.7        5.1      61.9
                                      (0.11)     (0.28)     (0.20)    (0.32)    (0.07)     (0.36)     (0.17)    (0.41)
             24-29                       4.1       25.8       11.7      58.4       1.0       32.8        3.0      63.2
                                      (0.29)     (0.52)     (0.43)    (0.61)    (0.10)     (0.71)     (0.22)    (0.70)
             30-39                       2.8       24.7       10.1      62.4       0.7       25.3        2.3      71.7
                                      (0.22)     (0.60)     (0.47)    (0.78)    (0.10)     (0.62)     (0.24)    (0.58)
             40 or Older                 2.4       16.4        7.0      74.2       0.7       16.6        1.0      81.7
                                      (0.18)     (0.68)     (0.47)    (0.83)    (0.09)     (0.65)     (0.16)    (0.65)
Race
             White                        3.7      24.2     10.7   61.5          1.1         28.9        4.2      65.8
                                      (0.10)     (0.42)   (0.24) (0.54)       (0.05)       (0.51)     (0.17)    (0.60)
           Black or African               3.3      32.4     14.0   50.4          0.9         37.8        3.2      58.1
          American
                                      (0.23)     (0.74)   (0.56) (1.05)       (0.10)       (1.57)     (0.25)    (1.65)
           Hispanic or Latino             3.7      21.2      9.5   65.6          1.1         24.9        3.5      70.5
                                      (0.22)     (0.83)   (0.43) (1.09)       (0.13)       (0.84)     (0.37)    (0.91)
           Asian                          3.0      17.3      5.3   74.4          1.3         20.0        2.8      75.9
                                      (0.38)     (0.80)   (0.34) (0.89)       (0.20)       (0.92)     (0.29)    (0.98)
           Other                          3.1      25.6      9.6   61.7          1.2         27.5        4.0      67.3
                                      (0.40)     (1.13)   (0.61) (1.21)       (0.22)       (1.09)     (0.38)    (1.12)
Source: NPSAS 2008 and NPSAS 2004.
The names of the variables used in this table are: PRIVPACK, GENDER, RACE and AGE.
The weight variable used in this table is WTA000.
Standard errors in parentheses.




       44             PRIVATE STUDENT LOANS
TABLE 5: UNDERGRADUATE STUDENT PARTICIPATION IN LOAN PRODUCT TYPES , BY FAMILY
CHARACTERISTICS (2007-2008 AND 2003-2004 ACADEMIC YEARS)

                                                     2007-2008 Academic Year              2003-2004 Academic Year
                                                                    Both                                 Both
                                                                   Non-                                  Non-
                                                           Non- Private                         Non- Private
                                               Private Private       and             Private Private      and
                                                Loans     Loans Private        No     Loans    Loans Private      No
                                                 Only      Only    Loans     Loans     Only     Only    Loans Loans
                                                  (%)       (%)      (%)       (%)      (%)      (%)      (%)     (%)

All Students
                                                   3.6     24.5      10.6     61.3       1.1     29.1      3.9     65.9
                                                (0.09)   (0.19)    (0.16)   (0.24)    (0.18)   (0.04)   (0.17)   (0.14)

Dependency Status
                                 Dependent         3.8     25.5      11.2     59.4       1.3     31.9      5.5     61.4
                                                (0.11)   (0.27)    (0.19)   (0.33)    (0.07)   (0.41)   (0.17)   (0.49)
                                 Independent       3.3     23.4       9.9     63.4       0.9     26.2      2.3     70.6
                                                (0.14)   (0.30)    (0.27)   (0.35)    (0.05)   (0.37)   (0.15)   (0.33)
  Parental Education

                                 High School      3.4      25.4     11.4      59.8      0.9     30.6      3.5     64.9
                                or Less
                                                (0.13)   (0.30)    (0.28)   (0.37)    (0.07)   (0.43)   (0.20)   (0.41)
                                 College, no       3.8     25.8      10.8     59.6       1.1     30.0      4.3     64.6
                                Degree
                                                (0.27)   (0.61)    (0.39)   (0.78)    (0.14)   (0.54)   (0.27)   (0.59)
                                Associate’s        3.7     25.5      11.8     59.1       1.2     28.4      4.4     66.1
                                Degree/         (0.27)   (0.51)    (0.38)   (0.69)    (0.13)   (0.68)   (0.29)   (0.74)
                                Vocational
                                Training
                                 Bachelor's       3.7      23.8     10.2      62.4      1.1     27.9      4.2     66.8
                                Degree
                                                (0.14)   (0.41)    (0.29)   (0.47)    (0.10)   (0.44)   (0.22)   (0.50)
                                 Post-             3.5     22.0       8.5     66.0       1.2     27.0      3.9     67.9
                                Graduate
                                Degree
                                                 (0.2)   (0.39)    (0.24)   (0.47)    (0.11)   (0.53)   (0.25)   (0.67)
Census Region of Permanent Residence
                                  Northeast        4.3     27.8      15.9     52.1       1.4     35.6      6.5     56.4
                                                (0.21)   (0.90)    (0.66)   (1.39)    (0.14)   (2.36)   (0.57)   (2.74)
                                 Midwest           3.6     29.9      12.7     53.7       1.1     32.6      4.7     61.6
                                                (0.17)   (0.51)    (0.53)   (0.75)    (0.10)   (1.42)   (0.29)    (1.6)
                                 South             3.5     25.4       9.9     61.2       0.9     30.9      3.3     64.9
                                                (0.15)   (0.52)    (0.37)   (0.77)    (0.08)   (1.04)   (0.24)   (1.09)
                                 West              2.7     18.1       6.9     72.3       0.8     21.9      2.7     74.5
                                                (0.16)   (0.52)    (0.34)   (0.62)    (0.09)   (1.03)   (0.25)   (1.07)
                                 Other             7.0      7.8       3.6     81.6       2.8      8.7      0.7     87.8
                                                (0.84)   (0.96)    (0.62)   (1.53)    (0.50)   (2.40)   (0.28)   (2.47)




   45               PRIVATE STUDENT LOANS
 Income Quartile
                              First Quartile      3.4     29.8    10.5      56.3      0.9     33.4      3.7     62.0
                                                (0.2)   (0.52)    (0.3)   (0.58)   (0.08)   (0.48)   (0.23)   (0.47)
                              Second              3.8     27.4    12.1      56.7      1.1     35.0      4.3     59.6
                              Quartile
                                               (0.17)   (0.37)   (0.39)   (0.54)   (0.09)   (0.57)   (0.21)   (0.55)
                              Third               3.9     24.2     11.5     60.4      1.2     29.0      4.4     65.4
                              Quartile
                                               (0.17)   (0.39)   (0.34)   (0.56)   (0.09)   (0.52)   (0.24)   (0.65)
                              Fourth              3.1     16.5      8.2     72.1      1.1     18.4      3.1     77.4
                              Quartile
                                               (0.14)   (0.54)   (0.25)   (0.57)   (0.09)   (0.55)   (0.16)   (0.63)

 Source: NPSAS 2008 and NPSAS 2004.
 Standard errors in parentheses.
 The names of the variables used in this table are: PRIVPACK, PAREDUC, PCTALL, DEPEND and STUSTATE.
 The weight variable used in this table is WTA000.




FIGURE 15: AVERAGE 2007-2008 ACADEMIC YEAR LOAN AMOUNTS
BY INCOME QUARTILE, INDIVIDUALS WHO REPORT POSITIVE LOAN
AMOUNTS




Source: NPSAS 2008
The names of the variables used in this chart are: STAFSUB, STAFFAMT, PRIVLOAN,
TFEDLN2, PCTDEP, TOTLOAN2 and STAFUNSB.
Note that federal loans includes PLUS loans.




    46             PRIVATE STUDENT LOANS
TABLE 6: UNDERGRADUATE STUDENT PARTICIPATION IN LOAN PRODUCT TYPES,
BY INSTITUTION AND PROGRAM CHARACTERISTICS (2007-2008 AND 2003-2004
ACADEMIC YEARS)


                              2007-2008 Academic Year              2003-2004 Academic Year
                                             Both                                 Both
                                            Non-                                 Non-
                                    Non- Private                         Non- Private
                          Private Private     and              Private Private     and
                           Loans Loans Private        No        Loans Loans Private         No
                            Only     Only Loans Loans            Only    Only Loans Loans
                             (%)      (%)     (%)     (%)         (%)      (%)     (%)     (%)
All Students                  3.6     24.5    10.6   61.3          1.1    29.1      3.9    65.9
                           (0.09)   (0.19)  (0.16) (0.24)         3.57    0.27    4.13     0.57


Institution Sector
  Public Less-Than-
  2-Year                      3.2     11.0      3.9     81.9       1.1      7.5      0.7     90.6
                           (0.95)   (0.88)   (0.92)   (1.03)    (0.47)   (1.93)   (0.32)   (2.27)
  Public 2-Year               2.9      9.6      1.9     85.6       0.8      9.1      0.7     89.4
                           (0.16)   (0.15)   (0.09)   (0.28)    (0.07)   (0.12)   (0.05)   (0.15)
  Public 4-Year               4.3     33.0      9.6     53.0       1.3     40.8      3.8     54.1
                           (0.14)   (0.26)   (0.21)   (0.26)    (0.09)   (0.29)   (0.17)   (0.30)
  Private Not-for-            5.4     20.4     10.5     63.7
  Profit, Less-Than-
  2-Year                   (1.14)   (12.7)   (5.96)   (19.2)
  Private Not-for-            2.7     32.1     15.0     50.3
  Profit, 2-Year           (0.77)   (7.07)   (3.50)   (9.33)
  Private Not-for-                                                1.3     33.7      4.2     60.9
  Profit Less than 4-
  Year                                                          (0.44)   (3.30)   (1.05)   (3.48)
   Private Not-for-           3.9     34.9     20.6     40.6       1.5     45.3      9.8     43.4
  Profit 4-Year            (0.28)   (0.50)   (0.47)   (0.53)    (0.13)   (0.56)   (0.55)   (0.63)
  Private for-profit         10.1     43.5     24.2     22.2       1.4     61.6      7.8     29.2
  Less-than-2-Year         (0.73)   (1.09)   (1.18)   (0.88)    (0.13)   (1.88)   (0.36)   (1.98)
  Private for-Profit 2                                             1.0     66.4     13.1     19.5
  Years or More                                                 (0.19)   (1.99)   (1.82)   (0.98)
  Private for-Profit 2-       1.2     54.9     40.6      3.3
  Year                     (0.32)   (3.19)   (2.91)   (0.62)
  Private for-Profit 4-       1.7     49.0     44.7      4.6
  Year                     (0.22)   (2.02)   (1.96)   (0.44)




   47             PRIVATE STUDENT LOANS
Attendance Intensity
    Exclusively Full-
  Time                      3.8     32.9     15.2     48.0          1.2     39.6      6.0     53.1
                         (0.13)   (0.34)   (0.26)   (0.34)       (0.07)   (0.39)   (0.25)   (0.45)
   Exclusively Part-
  Time                      3.2     11.6      3.7     81.4          0.7     13.4      0.9     85.0
                         (0.14)   (0.50)   (0.28)   (0.73)       (0.07)   (0.36)   (0.07)   (0.37)
   Mixed Full-Time          3.5     27.8     12.0     56.7          1.3     31.4      4.0     63.2
  and Part-Time          (0.16)   (0.48)   (0.36)   (0.52)       (0.12)   (0.74)   (0.22)   (0.76)

Program Type
   Certificate              5.3     24.8     15.5     54.3          1.1     34.3      3.9     60.6
                         (0.45)   (1.29)   (1.04)   (1.63)       (0.18)   (1.55)   (0.25)   (1.59)
   Associate's Degree       2.9     15.3      6.1     75.6          0.8     15.8      2.1     81.3
                         (0.17)   (0.34)   (0.20)   (0.39)       (0.08)   (0.55)   (0.24)   (0.55)
   Bachelor's Degree        4.0     34.8     14.8     46.4          1.3     43.4      6.0     49.2
                         (0.11)   (0.28)   (0.23)   (0.29)       (0.07)   (0.36)   (0.19)   (0.39)
  Not in a Degree           2.6      6.2      2.0     89.2          0.8      7.7      0.9     90.7
  Program                (0.29)   (0.62)   (0.44)   (0.95)       (0.16)   (0.52)   (0.16)   (0.61)
Source: NPSAS 2008 and NPSAS 2004.
The names of the variables used in this table are: PRIVPACK, UGDEG, SECTOR1 and ATTNPTRN.
The weight variable used in this table is WTA000.
Standard errors in parentheses.




   48            PRIVATE STUDENT LOANS
TABLE 7: AVERAGE LOAN AMOUNTS BY SCHOOL TYPE,
UNDERGRADUATES WITH POSITIVE LOAN AMOUNTS, 2007-2008 ACADEMIC
YEAR


                            Private Loans                                                 Non-Private
                                Only             Private and Non-Private Loans            Loans Only
                                                    Total     Private     Federal
                              Total Loans         Loans        Loans       Loans             Total Loans
Institution Sector                     ($)            ($)         ($)         ($)                     ($)

 Public 4-Year                       7,563        11,441        5,674        5,595                 6,706
                                   (186.0)        (118.8)       (92.7)       (71.0)                (75.4)
 Private Not-for-Profit
4-Year                             11,737         $15,553        8,771       6,641                  8,160
                                   (697.0)         (231.4)     (177.2)     (120.9)                (181.6)
 Private for-Profit 4-
Year                                 7,878        $12,282        6,249       5,923                  6,477
                                   (927.0)         (322.3)     (269.3)     (166.6)                (345.7)
 Public 2-Year                     $3,662          $7,732        3,884       3,831                  4,093
                                   (130.2)         (224.3)     (118.3)     (139.7)                (162.8)
 Private Not-for-Profit
2-Year                              $6288        $12,094         6,613       5,069                  6,314
                                   (736.1)       (1002.2)      (693.7)     (268.4)                (342.4)
 Private for-Profit 2-
Year                               $6,784        $11,734         6,016       5,708                 6,210
                                   (573.7)        (636.5)      (446.0)     (240.2)               (309.3)
 Private Not-for-Profit,                 ‡       $11,683         6,717       4,966                 5,712
Less-Than-2-year                         ‡       (1664.1)     (1024.7)     (755.4)              (1112.4)
Public Less-than-2-Year              4,594         $9,134        4,050       5,059                 4,915
                                   (660.9)        (580.0)      (320.6)     (417.9)               (296.5)
 Private for-Profit Less-
Than-2-Year                          5,287        10,148         4,687       5,446                  5,789
                                   (299.0)        (239.0)      (198.4)     (156.5)                (209.1)

Source: NPSAS:08. Undergraduates.
‡ Unstable estimate, output suppressed.
Standard errors in parentheses.
Sample restricted to undergraduates with positive loan amounts for either private or non-private loans.
The names of the variables used in this table are: PRIVPACK, PRIVLOAN, TFEDLN2, TOTLOAN2 and SECTOR1.
The weight variable used in this table is WTA000.




   49            PRIVATE STUDENT LOANS
LOAN AMOUNTS

Table 7 reports mean loan amounts by institution type for borrowers who only have
PSLs, borrowers with a combination of PSL and non-PSL loans (federal, state, and
institutional loans), and borrowers with federal loans only. Unsurprisingly, for
students who have any educational loans, total loan amounts are largest for those who
have a combination of PSL and non-PSL loans, across all institutional sectors. For
example, among students who attend public 4-year institutions, the amount borrowed
is $7,563 for students who only have PSLs, $6,706 for students with only non-private
loans, and $11,441 for students with a combination of PSL and non-PSL. Also, the
mean total loan amount for borrowers with a combination of PSL and non-PSL is
significantly larger for students who attend private 4-year non-profit schools ($15,553)
than it is for students who attend 4-year public schools ($11,441).112

For students who attend two-year schools, total loan amounts are larger for those who
attend private (either not-for-profit or for-profit) schools than for those who attend
public schools. This holds across all borrower categories: individuals with private
loans only (differences of $2,627113 and $3,122114 respectively), individuals with a
combination of private and non-private loans (differences of $1,027115 and $675116,
respectively), and individuals with non-private loans only (differences of $2,222117 and
$2,117118 respectively).




USE OF OTHER FORMS OF FINANCIAL AID
As discussed earlier, educational borrowing is only one source of funding for school,
and it is important to understand it in the context of other sources of student funding.
PSL borrowers make use of other forms of student aid, such as federal and private
grants, work study, and academic, athletic or need-based scholarships.119

GRANTS AND WORK STUDY
Table 8 presents the percentage of students who have grant or work study awards by
the type of educational loans that they have, and average amounts of these forms of
aid for those who report a positive amount. Although a higher proportion of students
with non-private loans have grants compared to students who have a combination of
private and non-private loans,120 there is no statistical difference between the mean
grant amounts for these groups.121 Also, the proportion of students with a
combination of PSLs and federal loans who participate in work study is not statistically
different from the proportion of students with federal loans only who participate in
work study.122

STAFFORD LOAN EXHAUSTION
As shown in Table 9, most PSL borrowers apply for student aid; only 12.2% do not.
Also, 10.9% of PSL borrowers apply for aid but do not take up Stafford loans. Put
another way, of undergraduates who apply for federal aid and take up PSLs, 12.4% do
not have Stafford loans.123 Many PSL borrowers who also have Stafford loans do not


    50            PRIVATE STUDENT LOANS
exhaust their loan limits: approximately 40% of PSL borrowers with Stafford loans do
not borrow their individual Stafford loan maximum.124 As discussed above, with few
exceptions, this is rarely an economically beneficial choice.




 TABLE 8: NON-LOAN FINANCIAL AID BY LOAN TYPE, 2007-2008 ACADEMIC
 YEAR


                                         Grants                           Work Study
                                                   Average                              Average
                                                  Amount if                            Amount if
                                Percentage         Positive         Percentage          Positive
 Loan Type                             (%)              ($)                (%)               ($)
 Private Loans Only                    35.4           4,241                4.3             2,381
                                     (1.64)          (169.8)             (0.45)           (167.3)
 Non-Private Loans Only                74.0           5,799               13.0             2,233
                                     (0.68)           (64.4)             (0.30)            (34.7)

 Both Non-Private and                  68.7           5,847               14.1             2,053
 Private Loans                       (0.78)          (138.2)             (0.58)            (45.6)
 No Loans Received                     40.8           3,931                4.2             2,818
                                     (1.59)           (85.0)             (0.25)            (62.1)

 Source: NPSAS:08.
 Standard errors in parentheses.
 The names of the variables used in this table are: PRIVPACK, TOTGRT and TOTWKST.
 The weight variable used in this table is WTA000.




    51           PRIVATE STUDENT LOANS
TABLE 9: AMONG STUDENTS WHO BORROWED PSLS, THE AMOUNT OF PRIVATE
LOANS AND STAFFORD SUBSIDIZED/UNSUBSIDIZED LOANS BORROWED BY
STAFFORD LOAN USE STATUS



                                                     Average Private             Average Stafford
                               Percent               Loan Amount                  Loan Amount
                                 (%)                       ($)                         ($)

                                                             6,533                       15,081
Total                             100.0
                                                              (88)                         (31)

                                   12.2                      7,582
Did not Apply for Aid                                                                         †
                                 (0.53)                      (210)

Applied for Federal Aid
                                   10.9                      6,591
but Did Not Receive a                                                                         †
                                 (0.66)                      (356)
Stafford Loan

Received Stafford Loan

        Received Less than
                                   31.4                      6,065                        3,918
        the Maximum
                                 (0.61)                      (151)                         (53)
        Amount

                                                                                          5,857
        Received the               45.5                      6,920
                                                                                           (42)
        Maximum Amount           (0.63)                      (127)

Source: NPSAS:08.
Standard errors are in parentheses.
† Not applicable.
The names of the variables used in this table are: STAFCT3, STAFFAMT, PRIVPACK, and PRIVLOAN.
The weight variable used in this table is WTA000.




REPAYMENT BEHAVIOR AND EMPLOYMENT
The analysis of repayment behavior and employment makes use of the BPS:04/09
(Beginning Postsecondary Students study), and examines the 2009 repayment behavior
of the cohort of students who began their post-secondary education in the 2003-2004
academic year. This timing means that the analysis considers individuals who, at the
time of the 2009 survey, were recently out of school: for example, a member of this
cohort who completed a bachelor’s degree in 4 years would have graduated in 2007,
and would be only two years into his or her career at the time of the 2009 wave of the

    52             PRIVATE STUDENT LOANS
survey. Since all borrowers are responsible for repaying their federal and non-federal
educational loans regardless of whether they graduate, this analysis also includes
borrowers who left school without a degree as well as those who were still enrolled
when the 2009 survey was conducted.

MONTHLY STUDENT LOAN PAYMENTS
In this discussion of loan repayment, it is important to note that borrowers report their
current payment in BPS:04/09, and this does not account for adjustments to original
payment obligations such as income-based repayment, PSL deferral, or loan
consolidation. Although repayment amount includes both PSL and non-PSL loan
amounts, the analysis is restricted to individuals who report having a private student
loan.

STUDENT LOAN PAYMENTS AS A FRACTION OF MONTHLY INCOME
Table 10 shows total student loan payments as a percentage of 2009 monthly income
by cumulative educational attainment, and includes students who were still actively
enrolled in school at the time of the survey. The majority of students who have PSLs
(63%) have monthly student loan payments that are 5% or less of their income, and
80% have monthly loan payments that are 10% or less of their income, as shown in the
first two columns of Table 10. On the other end of the spectrum, 5% of PSL
borrowers have monthly student loan payments that are greater than 25% of their
monthly income, as shown in the last column. Among those with PSLs, 62% of
bachelor’s degree recipients have monthly payments that are 10% or less of their
income and 10% have monthly payments greater than 25% of their monthly income.
Note that by function of program length, bachelor’s degree recipients may have
completed their degrees more recently than individuals who attained other degrees or
certificates. Individuals who did not attain a degree or certificate and had PSLs also
report having student loan payments in 2009; 88% had monthly payments of 10% or
less of their income.




    53            PRIVATE STUDENT LOANS
 TABLE 10: MONTHLY STUDENT LOAN PAYMENTS IN 2009 AS A PERCENTAGE OF INCOME,
 PRIVATE STUDENT LOAN BORROWERS WHO BEGAN POSTSECONDARY
 EDUCATION IN 2003-2004


                                             Monthly Student Loan Payment as a Percentage of Income
                                                                                                 More
                                             0 % to    6% to      11 to  16% to     21% to       than
                                                5%      10%       15%       20%        25%       25%
 Totala                                        63.5        16.0         8.1         4.9         2.4           5.0
                                              (1.86)      (1.37)     (0.89)      (0.62)      (0.49)      (0.78)
  Attained Bachelor's Degree                   43.3        18.8        14.8         8.7         4.3       10.0
                                              (2.11)      (1.57)     (1.57)      (1.07)      (0.87)      (1.93)
  Attained Associate's Degree                  72.3        14.5         4.6         3.5         0.6           4.4
                                              (5.18)      (3.63)     (1.90)      (1.68)      (0.58)      (1.79)
  Attained Certificate                         80.1        12.1         2.7         3.5         0.4           1.3
                                              (3.06)       (2.4)     (1.07)      (1.45)      (0.38)      (1.00)
  No Degree, Left Without Return               72.7        15.4         5.1         2.6         2.0           2.2
                                              (3.16)      (2.66)     (1.63)      (0.93)      (0.77)      (0.84)
 Source: BPS:04/09, restricted to individuals who had a private student loan.
 Standard errors in parentheses.
 a
  Total includes respondents who are still enrolled, which are not included in a separate row in the table.

 Student loan payments include both private and federal loans.
 The names of the variables used in this table are: PROUT6, EDPCT09 and LNTY09B.
 The weight variable used in this table is WTB000.




NOMINAL MONTHLY STUDENT LOAN PAYMENTS
Since income may vary between borrowers and is only reported for individuals who
were employed, monthly student loan payments are also presented in nominal dollars.
Table 11 considers nominal monthly student loan payments by the sector and level of
institution at which a PSL borrower began his or her postsecondary education in the
2003-2004 academic year, and includes individuals who did not complete their degrees.
There is a larger percentage of individuals with monthly payments of at least $225
among PSL borrowers who started their undergraduate careers at public and not-for-
profit 4-year institutions than among those who did not.125 There is no statistically
significant difference amongst individuals with payments of at least $225 between the
group that attended 4-year not-for-profit private schools and 4-year public schools.126
Borrowers with monthly payments of $225 or more per month also vary by
educational attainment: 57% of individuals who attained a bachelor’s degree have
monthly payment in excess of $225, while 34% of individuals who ever had a PSL
(including those with bachelor’s degree) have student loan payments in excess of $225

    54             PRIVATE STUDENT LOANS
per month (results not shown in table).127 Recall that this includes repayment amounts
for both federal and private debt, and that federal borrowing limits increase with the
number of years of school attended up to a lifetime cap, so students at four-year
schools may have been eligible for more federal debt than students at 2-year or less
institutions.




    55            PRIVATE STUDENT LOANS
 TABLE 11: MONTHLY STUDENT LOAN PAYMENTS IN 2009 BY FIRST TYPE OF
 POSTSECONDARY INSTITUTIONS, UNDERGRADUATES MATRICULATING IN 2003-2004
 (INCLUDES NON-COMPLETERS)


                                                                     Monthly student loan repayments 2009
                                                                                            $120-    $225 or
                                                                       $1-69    $70-119       224       more
 Total                                                                   20.5       20.4      25.3       33.7
                                                                       (1.60)     (1.47)    (1.76)     (1.40)
  Public 4-Year                                                          14.9       13.7      26.2       45.2
                                                                       (2.31)     (1.99)    (2.65)     (2.73)
  Private Not-for-Profit 4-Year                                          10.5       13.0      25.5       51.1
                                                                       (1.90)     (1.83)    (2.92)     (2.74)
  Private For-Profit 4-Year                                              20.5       15.4      43.7       20.4
                                                                       (8.71)     (6.67)   (11.60)     (8.54)
  Public 2-Year                                                          20.7       24.5      22.9       31.8
                                                                       (2.99)     (3.59)    (3.00)     (3.60)
  Private Not-for-Profit 2-Year                                          18.5       31.6      38.8       11.0
                                                                       (12.4)     (15.3)    (16.5)     (10.4)
  Private for-Profit 2-Year                                                35       28.7      22.8       13.5
                                                                       (10.1)     (6.77)    (6.72)     (4.18)
  Private for-Profit, Less Than 2-Year                                   39.6       36.5      14.4        9.6
                                                                       (2.87)     (3.13)    (1.68)     (2.47)

 Source: BPS:04/09, restricted to private student loan borrowers.
 Standard errors in parentheses.
 The names of the variables used in this table are: LNTY09B, PROUT6, RPYAMT09, FSECTOR and LNTY09B.
 The weight variable used in this table is WTB000.



FEDERAL LOAN REPAYMENT OF PSL BORROWERS WHO BEGAN
POST-SECONDARY EDUCATION AT 2-YEAR OR LESS INSTITUTIONS

NCES longitudinal studies do not provide data on PSL repayment, but we do have
information on federal loan repayment for PSL borrowers. Since bachelor’s degree
graduates in this cohort who graduated on-time would have graduated in 2007,
sufficient time probably had not elapsed as of the 2009 survey for that survey to be
able to accurately report the default rate on federal loans for this group. Therefore,
Table 12 presents repayment status on federal loans for PSL borrowers by the type of
institution where they started their post-secondary education, restricted to individuals
who began their education at 2-year or less-than-2-year schools. This does not include
all PSL borrowers, since only individuals who also have federal student loans are
included. Among PSL borrowers who also had federal loans, a higher proportion of
individuals who started their postsecondary education at 2 year for-profit institutions


    56            PRIVATE STUDENT LOANS
are in default on their federal loans than those started at 2 year public institutions: 18%
and 5%, respectively.128




 TABLE 12: FEDERAL STUDENT LOAN REPAYMENT AMONG PSL BORROWERS, 2009,
 TWO OR LESS YEAR INSTITUTIONS


                                                Federal Student Loan Repayment Status in 2009
                                 Loans Paid
                                  in Full or          In        Deferred/            In
 Type of Institution First        Cancelled    Repayment       Forbearance       Default      Not in Repayment
 Attended                               (%)          (%)               (%)          (%)                    (%)
  Public 2-Year                          7.2           44.6            15.7           4.5                 28.0
                                      (1.59)         (2.79)           (2.49)       (0.96)                (2.91)
  Private Not-For-Profit 2-
 year                                   10.1           69.0              7.4          4.1                  9.4
                                      (8.34)        (11.70)           (6.75)       (6.05)                (7.18)
  Private For-Profit, 2-year             9.6           60.8            10.5          18.4                  0.8
                                      (2.97)          (5.7)           (3.14)       (4.60)                (0.48)
  Private For-Profit, Less
 Than 2-Year                            16.6           42.6            18.2          18.5                  4.0
                                      (2.09)         (4.39)           (3.45)       (2.66)                (1.13)
 Source: BPS:04/09, restricted to individuals who had both private and federal loans.
 Standard errors in parentheses.
 The names of the variables used in this table are: PROUT6, LOANST09, FSECTOR and LNTY09B.
 The weight variable used in this table is WTB000.




    57             PRIVATE STUDENT LOANS
EMPLOYMENT AND EARNINGS

Table 13 presents employment rates at the time of the 2009 follow-up survey for
individuals in the 2003 student cohort who ever had a PSL. Unemployment rates were
calculated by dividing the percentage of individuals in a group who were not employed
but were looking for employment by the percentage of people who were either
employed or not employed but looking, which results in a calculated unemployment
rate of 16.4% for the BPS:04/09 cohort. Note that 6% of the sample is not employed
and not looking for employment, and the proportion of individuals out of the labor
force varies by educational attainment: the proportion of individuals who left
postsecondary education without a degree who are out of the labor force is higher than
the proportion of bachelor’s degree129 or associate’s degree130 recipients who are out of
the labor force. Also, the proportion of PSL borrowers employed is significantly
higher for those who attained bachelor’s131 and associate’s degrees132 than for those
whose highest level of attainment was a certificate or no degree, but there is no
statistical difference between the proportion of individuals with bachelor’s degrees or
associate’s degrees who are employed.133 Table 14 presents mean incomes for
individuals who report positive income in the 2009 survey by attainment and by
institution type first attended. It includes income data both for individuals who used
PSLs and for individuals who did not use PSLs. Mean incomes do not differ
significantly between PSL borrowers and non-PSL borrowers for any of these
categories.




    58            PRIVATE STUDENT LOANS
TABLE 13: EMPLOYMENT FOR PSL BORROWERS IN 2009 , INDIVIDUALS WHO ENTERED
POSTSECONDARY EDUCATION IN 2003-2004


                                                                          Not Employed
                                                                                and Not
                                                      Not Employed,            Currently
                                                        Looking for         Looking for         Calculated
                                         Employed      Employment          Employment       Unemployment
                                              (%)              (%)                  (%)              Rateb
Totala                                       78.73              15.48                5.79            16.4%
                                             (1.32)             (1.19)             (0.91)

Cumulative Persistence and Attainment
Attained Bachelor's Degree                   88.18              10.31                1.51            10.5%
                                             (1.47)             (1.33)             (0.43)
Attained Associate's Degree                  85.74              12.06                2.20            12.3%
                                             (4.46)             (4.07)             (1.20)
Attained Certificate                         73.74              18.67                7.60            20.2%
                                             (3.64)             (3.18)             (2.04)
No Degree, Left Without                      73.03              17.89                9.08            19.7%
Return                                       (2.41)             (2.04)             (1.81)




Source: BPS:04/09. Restricted to PSL borrowers.
Standard errors in parentheses.
a
  Includes individuals who are currently enrolled.
b
  Percent not employed but currently looking divided by sum of percent employed and percent not employed
and currently looking.
The names of the variables used in this table are: LNTY09A, PROUT6, and JOBSTB09.
The weight variable used in this table is WTB000.




   59            PRIVATE STUDENT LOANS
TABLE 14: 2009 INCOME BY PSL STATUS, INDIVIDUALS WHO ENTERED POSTSECONDARY
EDUCATION IN 2003-2004


                                                                                 Income in Dollars
                                                                              Individuals
                                                                                                      Private Student
                                                                         with No Private
                                                                                                     Loan Borrowers
                                                                           Student Loans
                                                                                                                  ($)
                                                                                      ($)
Total                                                                             31,114                      31,855
                                                                                  (625.1)                     (694.4)
                                 Panel A: Income by Cumulative Persistence and Attainment
 Attained Bachelor's Degree                                                       34,953                      35,588
                                                                                   (628.3)                   (1000.4)
 Attained Associate's Degree                                                       34,920                     33,680
                                                                                 (2273.7)                    (2264.6)
 Attained Certificate                                                              29,508                     27,248
                                                                                 (3563.4)                    (1227.8)
 No Degree, Still Enrolled                                                         25,525                          ‡
                                                                                 (1691.8)                          ‡
 No Degree, Left Without Return                                                    27,462                      29,876
                                                                                   (728.6)                   (1064.1)
                                    Panel B: Income by Institution Type First Attended
 Public 4-Year                                                                     33,549                     32,393
                                                                                   (632.6)                    (1070)
 Private Not-for-Profit 4-Year                                                     32,237                     34,740
                                                                                   (793.6)                   (1519.1)
 Private for-Profit 4-Year                                                         25,146                     33,554
                                                                                 (3365.3)                    (3817.4)
 Public 2-Year                                                                     31,008                     31,834
                                                                                 (1643.8)                    (1329.2)
 Private Not-for-Profit 2-Year                                                     31,765                     40,466
                                                                                 (4303.6)                    (8041.9)
 Private for-Profit 2-Year                                                         27,093                     27,690
                                                                                 (2532.1)                    (2181.2)
 Public Less-than-2-Year                                                           29,244                           ‡
                                                                                 (3261.1)                           ‡
 Private Not-for-Profit, Less Than -2-Year                                              ‡                           ‡
                                                                                        ‡                           ‡
 Private For-Profit, Less Than -2-Year                                             24,768                      25,582
                                                                                  (860.4)                    (1637.3)




   60             PRIVATE STUDENT LOANS
 Standard errors in parentheses.
 Source: BPS:04/09, restricted to individuals who report non-zero income.
 ‡ Unstable estimate, output suppressed.
 The names of the variables used in this table are: PROUT6, INCRES09, FSECTOR and LNTY09B.
 The weight variable used in this table is WTB000.




SAMPLE LENDER PORTFOLIO DATA SHOWS THAT MANY RECENT
GRADUATES HAVE DIFFICULTY MAKING PSL PAYMENTS.

The NCES data described above shows the broad context of PSL borrowers who
graduated in 2007 and 2008, at the beginning of the recent recession. In broad strokes,
most had manageable debt loads from both federal loans and PSLs, both in terms of
nominal dollar amount and in terms of percentage of income. At the margin, however,
are graduates like those with recent bachelor’s degrees, ten percent of whom have debt
service payments in excess of 25% of their income. Because federal loans can be
reduced to well below that level under income-based repayment, these borrowers in
the NCES data may illustrate the hardship of the PSL repayment difficulties described
below.

As set forth in Figure 16, the cohorts of PSL borrowers who took out PSLs in 2005
through 2009 have experienced significant cumulative default rates.




    61            PRIVATE STUDENT LOANS
FIGURE 16: (BASED ON $’S) GROSS CUMULATIVE DEFAULT CURVES
BY ORIGINATION VINTAGE (2005-2009) BY YEARS OF SEASONING
(SAMPLE LENDER PORTFOLIO)


                                                                         Gross	
  Cumulative	
  Defaulted	
  Loan	
  Balances	
  by	
  Origination	
  Vintage
                                                                                                              (by	
  Years	
  of	
  Seasoning)
                                                                 12.0%
                                                                 10.0%
  Percentage	
  of	
  Dollars	
  of	
  Loans	
  Defaulted


                                                                 8.0%
                                                                 6.0%
                                                                 4.0%
                                                                 2.0%
                                                                 0.0%




                                                                         Year	
  1     Year	
  2          Year	
  3              Year	
  4          Year	
  5   Year	
  6   Year	
  7
                                                                                                   2005       2006            2007           2008      2009


Figure 16, above, shows data from the Sample Lender Portfolio data set. More than
10% of borrowers who took out a PSL in 2005 (and separated in 2006 through 2009)
had defaulted by 2011 (6 years after origination). Similar difficulties with repayment
can be found with loans that are now owned in SLABS trusts. Moody’s and DBRS
track PSL default rates by vintage of the trust formation. That dating is roughly
equivalent to the year a loan was made. Thus, the following figure approximates
default rates for borrowers who took out loans in the 2005 - 2007 period.




                                                            62               PRIVATE STUDENT LOANS
FIGURE 17: DBRS ABS LIFETIME GROSS CUMULATIVE LOSSES




Default rates spiked significantly following the financial crisis of 2008 as the
subsequent recession exposed the weakened underwriting standards that were fueled
by the capital markets during the securitization and lending boom.134 Default rates
have since stabilized significantly, but are expected to remain high.135 Please note that
the cumulative default experience in the DBRS data exceeds the default experience
shown in the data from the lenders in our sample lender data. As our sample lenders
are largely composed of banks and depositories, it is likely that a mix of retained credit
risk, tighter prudential regulation, and survivor bias contribute to the differing loan loss
experience between our sample and the larger market, particularly with regard to the
2005 – 2007 period.

It is not clear that all of the dust from the PSL origination boom has settled. Of the
$140 billion Sample Lender Portfolio, only $97 billion is in repayment and current.
Over $30 billion is deferred or in forbearance.136 More recent graduates may be unable
to keep up with PSL payments. Table 15, below, shows the status of the Sample
Lender Portfolio at the end of 2011. Please note that the percentage of loans in
deferral has substantially declined since 2008 as a result of the concurrent decline in
originations. When fewer new (deferred) loans are originated, the percentage of the
total loan population in deferral will necessarily decrease over time.




    63             PRIVATE STUDENT LOANS
TABLE 15: $’S OF LOANS OUTSTANDING AS OF EACH CALENDAR
YEAR END SHOWN BY CATEGORY (INCLUDING DEFERRED LOANS)
(SAMPLE LENDER PORTFOLIO)

                                                                                                                          Loans	
  Outstanding	
  by	
  Status	
  as	
  of	
  Calendar	
  Year	
  End	
  (Includes	
  Deferred	
  Loans)
                                                                                                                                                                                                                                                                                                                                                    Dollars	
  in	
  Millions
                                                                             Total
                                               Outstanding                                                                                                           Current                                                                                            30	
  dpd                                                                                           60	
  dpd                                                                                               90	
  dpd                                                                                           120	
  dpd                                                                               Forbearance                                                                                                  Deferment                                                                               Bankruptcy
    2005           $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  55,893.5           $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  24,359.0	
                                                                                                             	
  
                                                                                                                                                                                                                          $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  785.7   $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  314.9          $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  196.6          $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  241.9          $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  4,215.8          $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  25,538.4	
            $	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  241.2
    2006           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  77,089.0    	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  33,922.1   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,261.4      	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  541.6   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  384.0   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  542.1   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  5,922.3   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  34,360.6   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  154.9
    2007           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  101,071.6           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  44,327.5   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,432.5      	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  726.8   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  501.2   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  765.3   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  10,001.8          	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  43,063.0   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  253.4
    2008           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  123,811.0           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  60,529.1   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  2,459.7                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,180.7                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  858.3                                                                                   	
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,445.9                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  5,333.8   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  51,651.1   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  352.5
    2009           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  132,961.3           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  72,399.0   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  2,920.9                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,586.4                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,394.4
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           	
                                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  2,978.0                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  3,833.5   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  46,999.0   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  850.1
    2010           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  136,656.3           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  85,432.7   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  3,132.1                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,585.9                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,357.6
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           	
                                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  3,058.8                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  3,126.2   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  37,731.0                                                                                   	
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,231.8
    2011           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  140,244.3           	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  97,426.9   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  3,378.3                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,732.7                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,441.9
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           	
                                                                                                      	
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  2,884.7                 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  3,376.0   	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  28,524.0                                                                                   	
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,479.8


                                                                                                                                    Percentage	
  of	
  Loans	
  by	
  Status	
  as	
  of	
  Calendar	
  Year	
  End	
  (Including	
  Deferred	
  Loans)
                                                                                                                                                     Current                                                                                              30	
  dpd                                                                                              60	
  dpd                                                                                               90	
  dpd                                                                                            120	
  dpd                                                                                  Forbearance                                                                                              Deferment                                                                                    Bankruptcy
    2005                                                                                                                                                                                    43.6%                                                                                                        1.4%                                                                                                   0.6%                                                                                                    0.4%                                                                                                    0.4%                                                7.5%                                                                                                  45.7%                                                                                          0.4%
    2006                                                                                                                                                                                    44.0%                                                                                                        1.6%                                                                                                   0.7%                                                                                                    0.5%                                                                                                    0.7%                                                7.7%                                                                                                  44.6%                                                                                          0.2%
    2007                                                                                                                                                                                    43.9%                                                                                                        1.4%                                                                                                   0.7%                                                                                                    0.5%                                                                                                    0.8%                                                9.9%                                                                                                  42.6%                                                                                          0.3%
    2008                                                                                                                                                                                    48.9%                                                                                                        2.0%                                                                                                   1.0%                                                                                                    0.7%                                                                                                    1.2%                                                4.3%                                                                                                  41.7%                                                                                          0.3%
    2009                                                                                                                                                                                    54.5%                                                                                                        2.2%                                                                                                   1.2%                                                                                                    1.0%                                                                                                    2.2%                                                2.9%                                                                                                  35.3%                                                                                          0.6%
    2010                                                                                                                                                                                    62.5%                                                                                                        2.3%                                                                                                   1.2%                                                                                                    1.0%                                                                                                    2.2%                                                2.3%                                                                                                  27.6%                                                                                          0.9%
    2011                                                                                                                                                                                    69.5%                                                                                                        2.4%                                                                                                   1.2%                                                                                                    1.0%                                                                                                    2.1%                                                2.4%                                                                                                  20.3%                                                                                          1.1%
                                                                                                                          Note:	
  percentages	
  may	
  not	
  e qual	
  1 00%	
  due	
  to	
  rounding




Source: Sample Lender loan level data

A pattern of difficulty in making payments is summarized in the default data in the
Sample Lender Portfolio data, as set forth in Table 16, below:


TABLE 16: DEFAULTED LOANS ($’S) BY EACH CALENDAR YEAR
SHOWN (ALL VINTAGES REPORTED 1999 – 2011)f


                                                                                                                                          Cumulative	
  Lifetime	
  Defaulted	
  Loans	
  as	
  of	
  Q4	
  2011	
  by	
  Origination	
  Vintage	
  ($	
  MM's)

         Prior	
  to	
  2005                                                                              2005                                                            2006                                                            2007                                                                   2008                                                                            2009                                                                      To	
  Date
                                                            	
                                                              	
                                                              	
                                                              	
                                                                                                                                                                                                                                            	
  
    	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  2,407.7 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,351.9 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,525.2 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,602.7 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  1,123.3 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  128.1 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  8,138.9


Source: Sample Lender loan level data

The cumulative defaults are over $8.1 billion, representing approximately 850,000
distinct loans at an average amount of $9,700 in the Sample Lender Portfolio. The
consolidated, de-identified dataset does not permit us to discern how many loans
involve the same borrower. However, while serial borrowing may reduce the number
of affected individuals, the incidence of co-signers for these loans will increase the
number of affected consumers.

         The scope of repayment difficulty varies greatly across lender types. Some
securitized trusts heavily loaded with direct to consumer loans have default rates
expected to reach 50%.137 In contrast, some depository institution lenders who never
made loans for sale have annual default rates that stayed below 4% in the worst of the


f
 Due to the methodology of de-identifying lender data, we cannot compute defaults as a
percentage of originations in any given year.


                 64                                                                                                                                               PRIVATE STUDENT LOANS
downturn. It would be incorrect to paint all lenders with the same brush when
evaluating repayment risk.

To summarize, the combination of looser credit standards, over-borrowing and the
recent recession caused a significant number of PSL borrowers to have difficulty with
repayment. We are unable to determine precisely how many, but the number is
significant.

BORROWERS HAVING DIFFICULTY WITH REPAYMENT HAVE FEW
OPTIONS TO CHANGE THEIR BEHAVIOR.

Financial institution lenders have reported efforts to mitigate repayment difficulties
that varied over the last five years.138 The student loan programs offered in the federal
Direct Loan program and the former FFEL program offer deferment or forbearance
of repayment, income-based and income-contingent repayment plans, public service
debt forgiveness and methods to cure default, such as rehabilitation and
consolidation.139 In contrast, income-based or income-contingent repayment has
never been a feature of private loans and is not now contemplated.

Prior to the financial crisis of 2008, many lenders allowed twelve months of payment
forbearance in the case of economic or medical hardship.140 With the bankruptcy of
the largest guarantor of PSLs and the close scrutiny of balance sheets that came with
the financial crisis,141 the incidence of PSL forbearance dropped substantially: at the
end of calendar year 2007, 17.1% of loans outstanding were in forbearance while at the
end of calendar year 2011 3.0% of loans were in forbearance. Table 17 shows the
rapid drop in percentage of loans in forbearance in the Sample Lender Portfolio:


TABLE 17: LOANS IN FORBEARANCE AS A % OF TOTAL LOANS IN
REPAYMENT (SAMPLE LENDER PORTFOLIO)

                                                   %	
  Of	
  Total	
  Loans	
  Outstanding	
  by	
  Status	
  as	
  of	
  CY	
  end	
  (EXCLUDING	
  Deferred	
  Loans)

                  Current                              30	
  dpd                          60	
  dpd            90	
  dpd                  120	
  dpd                       Forb           BK
2005                            79.3%                                 2.6%                            1.0%                 0.6%                        0.8%                       13.7%        0.8%
2006                            78.8%                                 2.9%                            1.3%                 0.9%                        1.3%                       13.7%        0.4%
2007                            76.0%                                 2.5%                            1.2%                 0.9%                        1.3%                       17.1%        0.4%
2008                            83.5%                                 3.4%                            1.6%                 1.2%                        2.0%                        7.4%        0.5%
2009                            83.8%                                 3.4%                            1.8%                 1.6%                        3.4%                        4.4%        1.0%
2010                            86.0%                                 3.2%                            1.6%                 1.4%                        3.1%                        3.1%        1.2%
2011                            87.0%                                 3.0%                            1.5%                 1.3%                        2.6%                        3.0%        1.3%
        Note:	
  p ercenta ges 	
  ma y	
  n ot	
  e qua l 	
  100%	
  d ue	
  to	
  roundi ng


Source: Sample Lender loan level data

The FFEL-style year of forbearance that was available until 2008-2009 has been
replaced by a policy of short-term forbearances that must be supported by evidence of
future ability to make payments and continued willingness to pay. Short-term
forbearances may not be tacked together, but must be separated by periods of timely
payments.142 A significant exception to this rule applies to loans securitized under the
old TERI-guaranteed servicing guidelines.143 The Sample Lenders are constrained by


       65                           PRIVATE STUDENT LOANS
certain of their prudential regulators from treating loans in extended forbearance as
performing assets.144 Sample Lenders, following prudential guidance, have all
implemented a second grace period immediately after the initial six-month post-
graduation grace. The second grace period is made available based on established
contact with the borrower and evidence of future willingness and ability to begin full
payments.145

Lenders in our sample do not currently offer loan modification programs, such as an
income-based payment reduction that is based on a debt modification.146 Once a loan
goes into default, neither securitization administrators nor Sample Portfolio lenders
have programs in place to cure the default if the borrower becomes employed. Some
Sample Lenders expressed a desire to create rehabilitation programs that would satisfy
accounting rules and prudential regulators.

To summarize, for the relatively high number of PSL borrowers currently having
difficulty with repayment, it is hard to avoid default and equally hard to escape it, as
compared to options available to federal loan borrowers.




    66             PRIVATE STUDENT LOANS
Part Three: Consumer
Protection
This section discusses three issues in consumer protection for PSL users:

    •    The scope of federal consumer financial laws147 applicable to PSLs.
    •    The need to limit direct-to-consumer lending to control excess borrowing and
         lending.
    •    Data and arguments relevant to the current legislative debate concerning
         consumer protections under the Bankruptcy Code for PSL borrowers.

PSLS ARE SUBJECT TO A VARIETY OF FEDERAL CONSUMER FINANCIAL
LAWS, AND RECENT CHANGES TO THOSE LAWS HAVE
SUBSTANTIALLY CHANGED CONSUMER PROTECTION.

PSL borrowers have significant protections under the Truth-in-Lending Act (TILA),148
the Equal Credit Opportunity Act (ECOA),149 the Fair Credit Reporting Act
(FCRA),150 the Fair Debt Collection Practices Act (FDCPA),151 the Federal Trade
Commission Act (FTCA),152 and the Consumer Financial Protection Act.153

The most significant recent change in protection of PSL borrowers occurred under
TILA. Prior to February of 2010, TILA required disclosure only at one specific time
for PSL borrowers, delivered prior to legal “consummation.”154 Additionally, before
February 2010, TILA did not apply to loans greater than $25,000, which would have
exempted some of the largest PSLs. Under the terms of many PSL contracts,
“consummation” did not occur until the time of disbursement of loan funds, meaning
that students learned of their loan terms shortly before arriving at school. As of 2010,
regulations issued under amendments to sections 128 and 140 of TILA require


    67            PRIVATE STUDENT LOANS
significant disclosures at three stages of the process (a) when applications begin (b)
when the lender first approves the loan, and (c) at disbursement.155 A PSL borrower
receives a thirty-day firm offer from the lender at loan approval. This change permits
borrowers to shop among prices specific to that borrower, without time pressure to
accept the first offer. After selecting a particular loan, a PSL borrower also receives a
disclosure at disbursement that includes a three-day right of rescission.156

The new TILA disclosures for PSLs are unique to that product. No other installment
loan is subject to quite so much disclosure. The disclosures must include information
as to the rates available on federal loans and whether those rates are fixed or variable.
Finally, each borrower must receive, sign and return a “self-certification” form that
highlights the availability of federal aid and contains a template for computing
borrowing need, the latter to limit over-borrowing.157

The new TILA procedures have only been in effect for two financial aid cycles. For
most undergraduates, it will take up to four cycles before there will be a complete
picture of the choices they have made to finance their education and the ability to
assess the impact of the new disclosures on their shopping choices. The Agencies
relied on 2008 NPSAS data to determine exhaustion of Stafford loans before using
PSLs, and new 2012 NPSAS data should be available in 2013. That data should help
assess the effectiveness of the new disclosure in the self-certification form and the loan
cost disclosures.

Existing PSL issues under the ECOA are discussed in greater detail later in this Report.
The FDCPA applies primarily after loans are transferred to a third-party collector after
default. The FDCPA has not been revised for many years and only recently became
the subject of general rulemaking authority by a federal agency.158 Consumer
protection concerns relating to the collection of PSLs are part of a larger issue
involving debt collection practices generally and are beyond the scope of this
Report.159

FCRA and TILA have both undergone recent revisions that have changed protections
for PSL borrowers. With respect to FCRA, section 1100F of Dodd-Frank required
creditors to increase their disclosure of credit scores to those consumers who pay
materially higher prices under a risk-based pricing system. Many PSL borrowers
dealing with financial institutions fall into that category.

THE FINANCIAL AID PROCESS CREATES INFORMATION GAPS NOT
ADDRESSED BY TILA.

Most of the existing federal consumer financial laws that address PSLs do so, at the
earliest, at the point when a borrower sets out to shop for and apply for a particular
loan with a particular lender. However, by that time, students have often already made
a series of decisions regarding school without critical information that is not supplied
until they apply for a loan. College acceptance decisions and related financial aid
awards (including FAFSA determinations) are frequently communicated in the spring.

Subsequent to that, enrollment decisions are made, deposits are submitted, and
numerous other steps are taken toward a new academic year. For an entering student, a

    68            PRIVATE STUDENT LOANS
PSL search might take place in July or August, even though the need to use a PSL is
effectively locked in by June 1. Thus, existing federal consumer financial laws may not
address students’ need for information about PSLs at the optimal time.

Students and their families would be better served by having access to all pertinent
financial information concerning the college decision prior to deciding which college to
enroll at and how much debt to incur. Provisions of the HEOA require the Secretary
of Education to publish a model financial aid award letter, to improve the quality of
information provided to students. The Bureau assisted the Secretary by soliciting
comments from students and families on a draft “financial aid shopping sheet” that
sought to clarify key elements of the financial aid decision well before PSL decisions
are made.

Given the timing and information gap, generally by the time of the PSL application the
student already will have made a decision that carries with it necessary implications as
to how much debt to incur, and only after approval of a loan does the student have
information (such as interest rate and monthly payment projections) that is necessary
to determine whether debt will be manageable and whether the decision to enroll at a
particular college was the best financial decision. To the extent that schools decide
that recent “preferred lender list” regulations are too burdensome and decline to
provide PSL information with financial aid awards, this timing problem may be
exacerbated.

SCHOOL CERTIFICATION REDUCES THE RISK OF PSL OVER-
BORROWING.

Using the Sample Lender loan level data, the Agencies tested the level of over-
borrowing (borrowing in excess of the EFC) by analyzing the changing relationship
between PSL amounts and the tuition and fee component of the cost of the education
for each individual borrower. Figure 7 demonstrates that the growth in the ratio of
PSL loan amounts to tuition and fees is correlated with the securitization and lending
boom (2005 – 2008). During that period other sources of financial aid for college were
largely unchanged.160 Tuition and fees admittedly increased, but Figure 7 takes that
increase into account, because the ratios are computed using actual tuition and fees for
each year. The rapid growth in loan amounts as a multiple of core education costs
suggests that a significant portion of the incremental borrowing relative to tuition and
fees represents over-borrowing above and beyond financial need.

As discussed in Part One, PSLs in the 2005-2008 period reflected increasing use of
DTC lending, which circumvents controls on excessive loan amounts that can be
provided by the school financial aid office. Figure 6 shows the growth of DTC
lending and the reduction of school channel processing in the Sample Lender Data.
During the period when DTC lending grew the most, PSL loan amounts reached
175% of tuition. Students borrowed materially more, relative to the core cost of
school, without any reduction in other sources of aid. When lenders returned to
school certification, PSL average sizes fell to 80% of tuition without any corresponding
increase in the availability of federal loans for dependent undergraduates.161
Therefore, the Sample Lender data suggests that DTC lending is correlated with


    69            PRIVATE STUDENT LOANS
significant over-borrowing. Over-borrowing increases the likelihood of default, to the
detriment of both borrower and lender.162 Lenders have learned this lesson, returning
to certification of over 90% of undergraduate loans.163 But lenders’ appetite for risk
tends to ebb and flow – hence the concept of a credit cycle – and there is no assurance
that, as memory of the financial crisis fades, lenders will stick to requiring certification.
Public commenters from all constituencies, including lenders, suggested that school
certification should be mandatory.

PUBLIC COMMENTS FROM CONSUMERS ARE CONSISTENT WITH
EMPIRICAL DATA ABOUT CONSUMER RISKS.

Almost 2000 individual borrowers and other consumers responded to a public notice
published on November 17, 2011 seeking information to inform the preparation of
this Report. While respondents are not a representative sample of the entire
population of borrowers of private student loans, the responses illuminate some risks
to consumers in the marketplace, particularly for borrowers who are struggling
financially. Respondents expressed a mix of confusion, regret, and despondence about
their current circumstances.

A critical theme was the inability to recognize the crucial differences between federal
and private student loans. Some respondents discussed how they thought, or were
told, that their private student loans would have the same features (e.g., deferment) as a
federal student loan. Others pointed to the belief that they would not qualify for
federal student loans and thought that a private student loan was an economic
substitute. Some respondents remarked that private student loans were 'packaged' with
federal student loans in their financial aid offer, potentially contributing to the
economic substitute assumption.

Another theme that emerged was the challenge students experienced in gathering
reliable information. Many respondents discussed how they were dependent on the
school's financial aid office for information on student loans. Unfortunately, some
respondents believed that the quality of information they received was inadequate.
Whether or not this is true, it appears that schools, like brokers in other financial
product markets, play a major role in the borrower’s decision-making process.

Finally, many respondents discussed challenging repayment experiences with the
servicer of their private student loan. As with other product markets, respondents
described how they were unable to decipher why payment amounts would change and
were unable to negotiate alternate payment plans in times of hardship. Others
described lost payments and troubling debt collection experiences.

The Agencies did not seek to verify these comments or assess whether they reveal
violations of law. Nor can these comments be assumed to be representative of the
experience of PSL borrowers. What is clear, however, is that the complaints
themselves evidence opportunities to improve customer satisfaction and reduce
consumer harm among some borrower segments.




    70             PRIVATE STUDENT LOANS
PRIVATE STUDENT LOAN DEBT RECEIVES VERY DIFFERENT
TREATMENT IN BANKRUPTCY PROCEEDINGS COMPARED TO OTHER
CONSUMER LOANS.

         Many private student loan borrowers entering the labor market in the wake of
the recent recession have faced significant challenges, and many have defaulted on
their PSLs. Bankruptcy discharge may be an essential protection against consumer
injury that might otherwise result when a consumer lacks the income or other means
to manage debt. However, that benefit generally does not apply to student loans.164	
  
These loans are virtually immune from discharge in bankruptcy.

Special bankruptcy treatment for some PSLs dates back more than 20 years. The
preferential treatment for PSL obligations was originally limited to private student
loans made by non-profit entities, such as schools. Beginning in 1985,165 any loan
guaranteed by a non-profit private guaranty agency was excluded from discharge in
bankruptcy. This provision benefitted guarantees issued by nonprofits that were
specially created to support PSLs.166 Prior to 2005, many financial institutions used this
provision to render their loans immune to bankruptcy discharge by purchasing a loan
guaranty from a nonprofit, while others originated PSLs that were exposed to
bankruptcy discharge.167

In 2005 the bankruptcy code was amended so that all loans made for a qualified
education expense became exempt from discharge in bankruptcy absent “undue
hardship” to the debtor and his/her dependents.168 There is a heavy burden to prove
“undue hardship.”169 This burden is mitigated for federal student loan borrowers
through various income-based repayment, forbearance, and deferral options authorized
under Title IV that provide some alternative to bankruptcy relief. As discussed above,
there are few similar repayment options for private student loans.

In contrast to student loans, the vast majority of consumer loans and other consumer
credit products are dischargeable in bankruptcy. This includes secured loans like
mortgages and auto loans, which are subject to repossession or foreclosure of the
financed asset and completely unsecured loans like credit cards and so-called
“signature loans.” The realm of non-dischargeable debts is limited, and includes child
support payments, alimony, debts related to tax liens, claims arising out of wrongful
conduct (like a judgment against a drunk driver), and both federal and private student
loans. With the exception of private student loans, these debts have one of two
primary characteristics, either they are owed to the public or the creditor lacks
discretion over entering into the debtor-creditor relationship (or both). Federal
student loans are owed to the government, and excluding them from bankruptcy
discharge could be a method of defending the federal fiscal interest. The same
rationale applies to tax liens. Child support payments are both an involuntary
relationship for the children and a means of a protecting the public fiscal interest
because the State is generally responsible for children who lack financial support.
Likewise, the victim of a drunk driver has no choice with regard to the debtor-creditor
relationship.




    71            PRIVATE STUDENT LOANS
There is little in the Congressional record surrounding the 2005 changes to the
Bankruptcy Act regarding the rationale for treating private student loans similarly to
federal student loans and differently from general consumer loans. Given this lack of
explicit legislative intent, the Agencies attempted to determine whether an economic
rationale for non-dischargeability of private student loans might be suggested by the
available data. The remainder of this Part examines data on bankruptcy, credit
availability, and loan pricing.

DESPITE THE CHALLENGE OF DISCHARGING PSLS IN BANKRUPTCY,
MORE STUDENTS ARE TURNING TO BANKRUPTCY FOR PROTECTION.

In light of the $8.1 billion of Sample Lender Portfolio loans in default, it is clear that
there are a significant number of borrowers who are currently unable to repay PSLs
and have limited repayment or bankruptcy discharge options.170 For these borrowers,
the PSL obligation will remain with them indefinitely. Those who continue to be
unable to make payments face the potential of an ongoing negative credit history
which can, in turn, impede their ability to obtain employment, rent an apartment,
purchase insurance, and, of course, access mortgage financing and other credit.

Some borrowers have elected to file for bankruptcy, even though they cannot
discharge their student loan debt in the process. Table 18 shows the growth of loan
volume in bankruptcy status for the Sample Lender Portfolio:


TABLE 18: $ VALUE OF PSLS IN A BANKRUPTCY STATUS AS OF THE
END OF EACH CALENDAR YEAR FOR ALL REPORTED VINTAGES (1999-
2011), GROSS DOLLARS AND PERCENTAGE OF OUTSTANDING
BALANCE(SAMPLE LENDER PORTFOLIO) 171


                            Total	
  $	
  of	
  Loans	
  in	
  Bankruptcy	
  Status	
  as	
  of	
  CY	
  End	
  (All	
  vintages)

                 2005                              2006                                   2007                                      2008                                      2009                                      2010                            2011
                                                                                                         	
                                        	
                                        	
  
 	
  	
  	
  	
  	
  	
  	
  241.2 	
  	
  	
  	
  	
  	
  	
  154.9 	
  	
  	
  	
  	
  	
  	
  	
  	
  253.4 	
  	
  	
  	
  	
  	
  	
  	
  	
  352.5 	
  	
  	
  	
  	
  	
  	
  	
  	
  850.1 	
  	
  	
  	
  	
  	
  1,231.8 	
  	
  	
  	
  	
  	
  1,479.8


                    Loans	
  in	
  Bankruptcy	
  Status	
  as	
  of	
  CY	
  End	
  as	
  a	
  %	
  of	
  Total	
  Outstandings

       2005                               2006                                 2007                                   2008                                   2009                                   2010                                   2011
         0.8%                               0.4%                                  0.4%                                   0.5%                                   1.0%                                   1.2%                                   1.3%



Source: Sample Lender Loan Level data
Over 1% of the total Sample Lender portfolio was in bankruptcy at the end of 2011.

We attempted to measure the trend in use of bankruptcy. Because the Sample Lender
data does not connect originations to portfolio performance, we cannot test
bankruptcy as a percent of origination cohorts. However, a comparison of the number


         72                                       PRIVATE STUDENT LOANS
of dollars defaulting in each calendar year to the number of dollars in bankruptcy each
calendar year is possible. The change in that ratio is an indicator of how many
distressed borrowers have used bankruptcy even though it provides incomplete relief.
Table 19 shows the ratio of annual dollars in default to annual dollars in bankruptcy.


TABLE 19: $ VALUE OF PSLS IN A BANKRUPTCY STATUS AS OF THE
END OF EACH CALENDAR YEAR FOR ALL REPORTED VINTAGES (1999-
2011), AS A PERCENTAGE OF DEFAULTED LOANS (SAMPLE LENDER
PORTFOLIO)


  Balance	
  of	
  Loans	
  in	
  Bankruptcy	
  as	
  a	
  percentage	
  of	
  Defaulted	
  Loans	
  (Incidence)
                                           Calendar	
  Year	
  End
   2005             2006             2007                  2008          2009           2010               2011
   174.0%            89.0%             51.6%                 44.6%           39.9%           53.9%           69.0%


Source: Sample Lender Loan Level data

Our review of quarterly Sample Lender Portfolio data explains the spike in 2005-2006
filings. It reflects bankruptcy cases filed just before changes to the law went into
effect.172 Since then, use of bankruptcy declined initially but re-emerged significantly in
2010-2011, again despite the lack of discharge for student debt.

One hypothesis to explain this activity is that borrowers are using a Chapter 13 plan to
reduce their current payments and eliminate current collection activity. As the
recession and slow recovery produced sustained higher unemployment rates for recent
graduates, more distressed borrowers chose the Chapter 13 option. However, a
Chapter 13 filing only provides temporary payment relief. At the end of a Chapter 13
plan the PSL lender’s rights are unchanged, and any accumulated, unpaid interest is
added to the outstanding principal. An alternative hypothesis is that other,
dischargeable debts or other circumstances (e.g. medical conditions) caused these
student borrowers to seek bankruptcy protection. The Agencies do not have data to
determine which hypothesis is more likely to be correct.

Current data is not sufficient to support a complete analysis of the current disparity in
bankruptcy treatment between PSLs and other consumer loans.

After observing the frequent use of incomplete bankruptcy protection, the Agencies
sought to determine whether the market benefits of the 2005 changes to the
bankruptcy standard outweighed the harm to defaulted borrowers. We looked first for
reduction in price or increased access for the less creditworthy as evidence that the
market reacted to the 2005 change in the law in a way that would benefit consumers
generally. The data we have does not show that changes to the bankruptcy standard in
2005 directly led to lower prices or wider access to credit.

The analysis did not detect any general downward movement of price immediately
after the change to the law. Indeed, for loans governed by the 1-month LIBOR index
the mean margin increased by 80 bps during 2005-2006.173 This change may have

    73                PRIVATE STUDENT LOANS
reflected higher prices due to weaker credits, or other factors that outweighed the
positive credit effect of the law change. The data does not allow us to distinguish
between causes. In addition, any decrease or change in general pricing might be
masked by the pre-2005 availability of bankruptcy protection that was “purchased”
from a nonprofit guarantor.174 More importantly, any pricing effect of a change in
bankruptcy protection might also be masked by the rapid growth of low cost capital
from securitization in 2005-2006.

A similar uncertainty plagues any test of improved access to credit by the less
creditworthy that might have been caused by the 2005 change. One contemporary
analyst found negligible reductions in mean credit scores between 2004 and 2007
vintage securitizations, arguing from that data that the 2005 change did not improve
access to credit.175 If mean credit scores had declined, that would be evidence that
credit was more accessible to the less creditworthy. The Sample Lender loan level
data, however, do show a measurable decrease in mean credit scores during the period
from 2005-2007, which would suggest increased access to credit.176 As with price
changes, however, it is impossible to distinguish between the effect of the bankruptcy
law change and the broader effect of capital markets demand for PSL assets when
determining the cause for lower mean credit scores.

Another approach to determining the market benefits from the special bankruptcy
treatment of PSLs is to project the increased lender costs from higher frequency and
severity of net defaults, absent the special rule. Given how recently the change was
made, losses of bank lenders before and after the change could help measure the
benefit of the rule. In addition, collection data for non-profit guarantors whose loans
have been exempt from bankruptcy since 1985 would further refine that estimate.177

A third party analyst recently attempted to quantify the cost of a bankruptcy law
change, analyzing the Sallie Mae portfolio of non-cosigned loans (those most likely to
use a new bankruptcy relief). The analysis concluded that bankruptcy losses on a large
existing loan portfolio would increase from 3.6% to 4.3% of loan balances, based on
comparing pre- and post-2005 performance. The analyst estimated that this increase in
bankruptcy filing rates, plus changes in the recovery rates, would increase charge-offs
by $75 million and decrease recoveries by $78 million on a total base of $10.8 billion in
non-cosigned loans in repayment.178 The analysis also concluded “though credit
negative, we think the approximately $150 million increase in net charge-offs is
manageable relative to the company’s 2011 core earnings pre-tax income of $1,491
million,” with even smaller effects on other large bank lenders where PSLs represent a
smaller share of their overall business mix.179 The analysis concluded that allowing
private student loans to be discharged in bankruptcy could reduce future origination
volume and lead lenders to adjust their pricing to account for the greater risk.180 Some
of the cost might be absorbed by lenders, given competition, but the rather thin
market of PSL providers that exists today makes that less likely.

It is important to note that the foregoing analysis was limited to non-cosigned loans.
It assumed that creditworthy co-signers would not have a need for bankruptcy relief.
However, there may be a percentage of co-signed loans that belong in bankruptcy,
because of labor market issues for both the primary borrower and the co-signer and

    74            PRIVATE STUDENT LOANS
because of limitations on loan underwriters’ ability to judge the overall educational
indebtedness of students and their parents. In other words, some co-signers may be
overloaded with education debt and others may have become long-term unemployed.

The Agencies are unable to predict precisely the outcome of an analysis of the costs
and benefits of a bankruptcy law change. Such an analysis would compare that cost
with the harm to those suffering from defaulted PSLs today who cannot escape the
impact of the loans they cannot repay.

The Agencies also examined the discussion surrounding the moral hazard dimension
that is a component of bankruptcy policy. The initial decision to make federal student
loans virtually immune to bankruptcy discharge was based, in part, upon the perceived
moral hazard inherent in encouraging a student to use credit to purchase a valuable
intellectual asset which cannot be repossessed. Supporters of special bankruptcy
protection claimed that students could discharge the financial obligation through
bankruptcy after graduation, while reaping the financial benefits of the intellectual asset
for a lifetime.181 Proponents of the amendments to exempt federal loans from
discharge stated that to remove them would mean that the Bankruptcy Code would
then be “almost specifically designed to encourage fraud.”182 They also stated that
there was a basis for separating educational loans from other types of debt because
“the lack of collateral necessary for the educational loan is an indicator that educational
loans do differ substantially from other forms of debt [and that] these bankruptcies
could easily destroy the federal student loan programs, a harm that would be at least as
great as the fraud-type problem.”183 Congress, through the GAO, has researched the
impact of bankruptcy on the federal student loan program. In 1976, a GAO study was
commissioned to test the need for the law change. The study did not report a large
number of student loan bankruptcies.184 In 1997, a review by the Congressionally-
mandated National Bankruptcy Review Commission of 1997 did not find any
systematic abuse of the bankruptcy system for student loan discharge.185 In reviewing
a 1991 GAO study, the National Bankruptcy Review Commission found that “only a
fraction of 1% of all matured student loans were discharged in bankruptcy and that
bankruptcy filings constituted only three to four percent of student-loan losses, a rate
that compared favorably to the consumer credit industry overall.”186 These findings
from the last century may not, however, reflect current economic conditions. The
elevated level of private student loans currently in bankruptcy (1.3% of outstandings in
the Sample Lender portfolio data) and the continuing aftereffects of the financial crisis
and subsequent recession may represent a hitherto unknown potential impact of
bankruptcy discharge on the student loan market. These macroeconomic effects,
however, may not be permanent and thus may not significantly change the moral
calculus of a future student considering the use of PSLs over an entire educational
career.

The potential for moral hazard is different, however, for co-signed loans, which now
make up more than 90% of PSLs made to finance undergraduate education. In
contrast to the pre-credit student, the co-signer asks the lender to extend credit based
on the proven income, assets, employment, and payment history of the co-signer. Both
lender and co-signer expect that the co-signer can service the debt. That is the


    75            PRIVATE STUDENT LOANS
purpose of a creditworthy co-signer. In this context, the argument for non-
dischargeability as a control for moral hazard is unclear. The creditworthy co-signer
has a lot to lose. Indeed, there is an argument that a co-signer is positioned like any
other consumer borrower. The lender and borrower reasonably calculate that the
borrower can repay the loan. If they miscalculate, both lose, and a bankruptcy
discharge may be the ultimate (and appropriate) result. Finally, the co-signer who is a
parent may provide a control on the theoretical moral hazard affecting the student, to
the extent that parents have influence over financial behaviors of their children.

Thus, the theoretical moral hazard risks related to lending to a pre-creditworthy
student and a creditworthy co-signer are very different, so a policy choice is further
complicated when considering a loan to a combination of the two.187

The analysis of moral hazard around private student loan bankruptcy is complicated by
procedural alterations to bankruptcy law made by Congress in 2005. These changes
included adding a means test for individuals who attempt to obtain relief under
Chapter 7.188 Individuals whose income exceeds standardized expense amounts
(based on surveys compiled by the Internal Revenue Service) cannot pursue relief
under Chapter 7, and must proceed instead under Chapter 13. Arguably, a student
intent on “strategic default” could attempt to take advantage of his or her Chapter 7
eligibility during a period of low income following graduation, but such a filing could
be dismissed if it is consider by the court to be in “bad faith”189 (as with any consumer
debt under the new procedures). To obtain a full discharge in Chapter 13, the
individual must successfully complete an approved 3 to 5-year repayment plan.190 An
excusable failure to make all payments can result in a more limited discharge.191 A
plan can be approved only if the individual commits to use all his or her "disposable
income" - income net of those IRS-standardized expense amounts - to make the
payments proposed under the plan.192 These limits sharply restrict the discretion of
the bankruptcy court to address individual circumstances. Lawyers for bankruptcy
filers must now certify that they have determined, based on reasonable investigation,
that debtor claims are legitimate, and can now face liability for costs and civil penalties
for submissions are based on false information.193 The increased risk has resulted in
an increase in the attorney fees charged to bankruptcy filers and more generally in
considerable increase in the documentation required to support an application.g Thus,
there is an argument that 2005 procedural changes affecting all consumer debts
provide adequate controls for moral hazard and special treatment for PSLs is
unnecessary. Additionally, these procedural changes may shift many potential Chapter
7 filers into Chapter 13, where creditors would have three to five years capture
increases in income produced by higher education.

The 2005 general procedural changes also suggest that Congress might explore the
type of relief that might be afforded to those currently in distress with PSLs. If
Congress should find that the 2005 change did not provide the expected market

g
 Lois	
  Lupica,	
  American	
  Bankruptcy	
  Institute	
  National	
  Conference	
  of	
  Bankruptcy	
  Judges.	
  The	
  
Consumer	
  Bankruptcy	
  Fee	
  Study	
  Final	
  Report.	
  December	
  2011.	
  Available	
  at:	
  
http://bapcpastudy.files.wordpress.com/2011/12/cfsfinalreport_final_dec7.pdf


      76                    PRIVATE STUDENT LOANS
benefits, there may be a range of legislative improvements available, other than
complete and immediate discharge in bankruptcy. The historical changes in treatment
of student loans under the Bankruptcy Code provide examples. When limitations on
bankruptcy protection from federal student loans were first adopted in 1976, Congress
still allowed those students who tried to repay for a period of time (5-7 years) to obtain
a discharge.194 The same rules applied to non-profit lenders (schools) who had special
bankruptcy treatment at that time. It was only in 1998 that the rule against discharge
became virtually absolute.195



Drawing on this history, Congress might permit discharge of private loans after a
period of time in repayment. Similarly, Congress could allow a bankruptcy filing after
less than 5 years of repayment, but require the use of a Chapter 13 "wage earner"
proceeding for 3-5 years to obtain a discharge of a private student loan. This
procedure would allow the capture of the student borrower’s increased earnings
potential over a period of years before granting a discharge. Only where the
educational investment truly produced insufficient returns to repay that investment
would such a plan grant a discharge after less-than-full repayment. Recommendations
based on the foregoing discussion are set forth at the conclusion of this Report.




    77            PRIVATE STUDENT LOANS
Part Four: Fair Lending
Issues
This section examines issues identified in the statute that relate to private education
loans and the Nation’s fair lending laws, including:


    •    “the underwriting criteria used by private educational lenders, including the
         use of cohort default rate (as such term is defined in section 435(m) of the
         Higher Education Act of 1965);”
    •    “the terms, conditions, and pricing of private education loans;” and
    •    “whether federal regulators and the public have access to information
         sufficient to provide them with assurances that private education loans are
         provided in accordance with the Nation’s fair lending laws and that allows
         public officials to determine lender compliance with fair lending laws.”


Private student lending presents complexities that are not generally present in other
consumer debt products. In mortgage (and other secured) lending, the underlying
value of a home (or other asset such as a car), the borrower’s income, and the
borrower’s credit history are critical criteria in the underwriting process. In other
markets where lending is not secured by an asset, as is the case with credit cards,
lenders often rely on the ability to close or reduce lines of credit in addition to
underwriting based on credit history and income. In contrast, a private student loan
borrower pursuing postsecondary education full-time often lacks income and credit
history. In addition, because loans are generally funded in full and payments are
deferred, private student lenders lack the ability to limit or reduce an open line of
credit. Accordingly, to the extent lenders underwrite on the basis of the student’s
application rather than the creditworthiness of a co-borrower, lenders must choose


    78            PRIVATE STUDENT LOANS
some basis to distinguish borrowers who are more or less likely to repay out of a group
of borrowers who have little to no credit history and whose future earnings are
uncertain. Private student lenders have addressed these issues in recent years by
requiring borrowers to either be independently creditworthy or have a creditworthy co-
signer.

It may be reasonable to assume that future repayment ability is related to whether a
postsecondary education program adequately prepares a student for gainful
employment. As of the publication of this Report, the federal government does not
publish data on the earnings of graduates by program. However, there are some
statistics that may be correlated with the value of a degree from a particular school.
For example, schools self-report graduation and retention rates to the Secretary of
Education. The Department of Education also publishes a statistic called cohort
default rate for each school participating in Title IV programs.




COHORT DEFAULT RATE
Cohort default rate (“CDR”) is a measure of the federal student loan repayment
history of a particular group or “cohort” of borrowers. For each school, the CDR is
the percentage of the school’s borrowers entering repayment on federal student loans
during a particular period who default prior to the end of the period. Currently, the
period used to calculate CDR spans multiple federal fiscal years.

CDR is one tool used for determining a school’s eligibility for federal student loan
programs. Currently, the Department of Education removes a school’s eligibility for
those programs when the institution’s three most recent CDRs are above 25%, or
where the most recent CDR is greater than 40%. The Department of Education uses
CDR as an eligibility cutoff at these relatively high levels, because CDR is intended to
be used as a broad measure to evaluate the risk to taxpayers of guaranteeing loans at a
particular school. To that point, based on 2009 CDRs, published in 2011, only five
schools were excluded due to the Department’s rules. As designed by Congress, CDR
was not specifically intended to assist private lenders in eligibility, underwriting, and
pricing decisions,196 particularly at much lower levels of default (e.g. under 8%).
However, CDR has been used by private student lenders seeking a proxy for a
student’s likelihood of repaying.




FAIR LENDING IMPLICATIONS
The Equal Credit Opportunity Act (“ECOA”) makes it illegal for a creditor to
discriminate in any credit transaction against any applicant.197 One form of
discrimination recognized under the ECOA is disparate impact, which prohibits a
creditor practice that has a disproportionately negative impact on a prohibited basis,
even though the creditor has no intent to discriminate and the practice appears neutral
on its face, unless the practice meets a legitimate business need that cannot reasonably


    79            PRIVATE STUDENT LOANS
be achieved as well by means that are less disparate in their impact.198 Federal
regulators,199 as well as the private bar,200 have both recently pursued private student
lending actions that implicate fair lending issues.

Private student lenders’ use of CDR at very low default levels may present fair lending
concerns because, as discussed below, racial and ethnic minority students are
disproportionately concentrated in schools with higher CDRs. Accordingly, use of
CDR to determine loan eligibility, underwriting, and pricing may have a disparate
impact on minority students by reducing their access to credit and requiring those
minority students who meet the lenders’ eligibility thresholds to pay higher rates than
are otherwise available to similarly creditworthy non-Hispanic White students at
schools with lower CDRs.




USE OF CDR BY PRIVATE STUDENT LENDERS
The Sample Lenders provided information about how they use CDR and other
institution-based criteria to determine a student’s eligibility for their loan programs, as
well as underwrite and price their private student loans. In this context, the term
“eligibility” refers to whether a lender accepts applications from a particular
postsecondary school’s students. If a lender set its eligibility cutoff at a CDR of 12%,
then students from those schools with a rate at or below 12% would be eligible to be
considered for a loan, whereas students from schools with a rate above 12% could not
receive a loan, regardless of any particular student’s creditworthiness (or that of his or
her co-applicant).

The primary use of CDR by the Sample Lenders is to set such school eligibility cutoffs.
Prior to the 2008 financial crisis, many Sample Lenders employed an eligibility cutoff
between 10% and 12%. After the crisis, a majority of Sample Lenders report eligibility
cutoffs in the range of 6% to 8%, though some lenders have moved in the opposite
direction, increasing their cutoff as high as 20%. The majority of the Sample Lenders
report relying almost exclusively on CDR to set their school eligibility cutoffs.201
However, some Sample Lenders report setting eligibility cutoffs using CDR in
conjunction with other factors such as internal portfolio performance, while others
have phased out this particular use of CDR and replaced it with a school’s graduation
rate instead,202 and others may have phased out use of school-specific criteria entirely.

In terms of underwriting and pricing, the Sample Lenders largely report utilizing
traditional, individually-applied criteria, such as minimum FICO score or custom
scorecard measures, debt-to-income ratio, payment-to-income ratio, length of credit
history, number of trade lines, number of derogatory credit items, and
delinquency/bankruptcy history. Moreover, the Sample Lenders report that in general
private student loan borrowers must either be independently creditworthy or have a
creditworthy co-signer. A few Sample Lenders, however, did report utilizing CDR as
part of, if not the primary consideration in, their underwriting and pricing decisions.
Most of these lenders created custom scorecards that included CDR as a factor, and
used the scorecard for both underwriting decisions and determining pricing tiers.

    80             PRIVATE STUDENT LOANS
ACCESS TO DATA TO ASSESS FAIR LENDING
COMPLIANCE
In the mortgage market, lenders are required to collect and report applicant
demographic data in accordance with the Home Mortgage Disclosure Act.203 No
analog exists for private student loans. In fact, federal law generally prohibits lenders
from collecting this data.204 Accordingly, the public does not currently have complete
information to assess whether a particular lender is in compliance with the nation’s fair
lending laws.

Federal banking regulators, in their role as supervisors of financial institutions, typically
have the greatest access to lender data.205 In order to conduct a robust empirical
investigation of a lender’s compliance with ECOA, they would be best served if they
had the following types of data:


    1.   underwriting decisions and loan terms, including pricing
    2.   pricing grids or matrices
    3.   applicant credit characteristics, such as FICO score and debt-to-income ratio
    4.   applicant demographics, such as race and ethnicity



When applicant-level demographic data are not available, a common approach in fair
lending analysis is to impute demographic characteristics based on the applicant’s
address—considering, for example, whether an applicant resides in a predominantly
minority neighborhood. The inference of ethnicity from geographic data can have
significant limitations, especially for PSLs made only to a student and not to a co-
borrower, since students may use a temporary address, such as a dormitory or
apartment near their school, when they apply for student loans. It may thus be difficult
to accurately infer their demographic information from geographic data alone.
Accordingly, data limitations may impact federal banking regulators’ ability to evaluate
a lender’s compliance with the nation’s fair lending laws.




COHORT DEFAULT RATE AND SCHOOL
RACIAL AND ETHNIC DEMOGRAPHICS
Despite the data limitations, some meaningful insights into the fair lending
implications of private student lenders’ use of CDR can be gained by examining the
relationship between CDRs and minority enrollment at postsecondary schools,
focusing on CDR based eligibility cutoffs used by the Sample Lenders.206 One result
is Table 20, which provides an aggregate demographic profile of postsecondary schools


    81             PRIVATE STUDENT LOANS
by CDR range. It shows that African-American and Hispanic students are much more
likely to attend schools with higher CDRs.207

As a next step, our analysis focused on the racial and ethnic distribution of students
above and below the most commonly employed cohort default-rate cutoffs. Table 21
shows the average racial and ethnic make-up of schools in 2009, weighted by
enrollment, with CDRs above and below 8%. It shows that African-American and
Hispanic students are much more likely to attend schools with CDRs above the 8%
eligibility threshold.208



 TABLE 20: PROPORTION OF STUDENT ENROLLMENT BY DEMOGRAPHIC GROUP AND CDR
 RANGE, 2008-2009 ACADEMIC YEAR


                    Percent of Students Who Attend Schools With CDR in A Given Range
                     0≤CDR<5        5≤CDR<10 10≤CDR<15 15≤CDR<20 20≤CDR≤100                                 Count
 Total                     42.2%         25.8%         23.2%           6.8%          2.0%                  20,539,364
 Gender
   Male                     44.0%          25.2%            22.8%             6.1%              1.8%        8,793,497
   Female                   40.9%          26.2%            23.6%             7.2%              2.2%       11,745,867


 Racea
    White                   49.4%          25.1%            19.2%             5.5%              0.9%        6,904,535
    Black                   31.0%          28.1%            29.9%             7.9%              3.1%        1,530,810
    Hispanic                35.4%          27.5%            30.0%             5.2%              2.0%        1,415,793
    Asian                   65.7%          19.2%            11.6%             3.1%              0.4%          712,844
    Native                  44.3%          22.1%            23.2%             8.5%              1.9%           99,170
    American
    Unknown                 39.9%          23.9%            22.0%            11.1%              3.1%        1,718,751

 Source: IPEDS 2009 and PEPS.
 Data are reported for the 50 States, the District of Columbia, Puerto Rico, and the territories.
 a
  Students are not required to report race or ethnicity. Excludes students who report two or more races.




    82            PRIVATE STUDENT LOANS
TABLE 21: AVERAGE RACIAL AND ETHNIC DEMOGRAPHICS ABOVE
AND BELOW 8%, BY SCHOOL TYPE, 2008-2009 ACADEMIC YEAR




Source: IPEDS 2009 and PEPS. Data are reported for the 50 States, D.C., Puerto Rico, and
the territories.

We also calculated odds ratios showing the relative likelihood, as compared to all
students, that students of various racial and ethnic demographics would attend a
school with a CDR above or below the industry’s commonly used 8% and 12%
eligibility thresholds.209 Aggregating all schools, we found that African-American and
Hispanic students were almost twice as likely as students generally to attend schools
with a CDR above 8% than schools with a rate below the threshold. Moreover, a
similar pattern was observed at the 12% CDR threshold.210

The results are even more pronounced when looking at specific types of schools.
Results for the 2008-2009 academic year are presented in Table 22,211 which shows
that Hispanic students attending private four-year institutions were over seven times as
likely as students generally to attend schools with a CDR above 8% than schools with a
rate below the threshold; and African-American students attending Public four-year
institutions were almost four times as likely as students generally to attend schools with
a CDR above 8% than schools with a rate below the threshold.




    83            PRIVATE STUDENT LOANS
TABLE 22: ODDS-RATIOS FOR RACIAL AND ETHNIC DEMOGRAPHICS
ABOVE AND BELOW 8% AND 12%, BY SCHOOL TYPE, 2008-2009
ACADEMIC YEAR




Source: IPEDS 2009 and PEPS. Data are reported for the 50 States, D.C., Puerto Rico, and
the territories.




CONCLUSION

To be clear, these findings do not imply that there is a causal link between minority
enrollment and performance on federal loans. However, based on the observed
correlation between a school’s CDR and minority student enrollment, as well as the
odds ratios calculated in our analysis, lenders’ consideration of CDR in either school
eligibility or underwriting/pricing criteria may reduce credit access and increase prices
for minority student borrowers. The Department of Education uses CDR as a school
eligibility cutoff at relatively high levels because CDR is intended to be used as a broad
measure to evaluate risk to taxpayers of guaranteeing loans at a particular school.
Schools with a CDR above these levels may fairly be viewed as failing to improve the
income and employment prospects of their students. Thus, by limiting the extension
of credit at such schools the Department’s policy may serve a consumer protection
function as well. However, as designed by Congress, CDR was not specifically
intended to assist private lenders in eligibility, underwriting, and pricing decisions,
particularly at lower levels of default (e.g., under 8%). Accordingly, the Sample
Lenders’ general reliance on CDR to set eligibility cutoffs for their loan programs may
raise a threshold fair lending concern, requiring further analysis by lenders to provide
evidence of a legitimate business need to use CDR. The Agencies are mindful,
however, that our study lacked application-level data, which limited the authors’ ability


    84            PRIVATE STUDENT LOANS
to draw definitive conclusions about the above referenced fair lending implications of
CDR.

While the previously articulated risks associated with PSLs generally make federal loans
a better choice for consumers, the availability of such loans is statutorily limited, and
they do not cover the full cost of attendance at many schools. Accordingly, PSLs can
be an important tool in the education finance toolbox. Given that reality, it is
important that lenders offer this product in accordance with the nation’s fair lending
laws.




    85            PRIVATE STUDENT LOANS
Part Five:
Recommendations
RECOMMENDATIONS FROM THE DIRECTOR OF THE CONSUMER
FINANCIAL PROTECTION BUREAU

The Consumer Financial Protection Bureau opened its doors almost a full year ago. In
the private student lending industry, we have sought to increase transparency, ensure
compliance with existing laws of financial institutions, and educate the public on how
to make better decisions.

Congress can also help to make this market work better for students, families, schools,
and financial institutions. Below we identify some areas where Congress could help to
modernize our nation’s laws to meet the needs of today’s marketplace.

I. REQUIRING SCHOOL CERTIFICATION OF PRIVATE STUDENT LOANS
COULD REDUCE OVER-BORROWING AND LEAD TO BETTER PRODUCT
CHOICES.

Congress should consider requiring lenders to better coordinate with institutions of
higher education prior to originating a private student loan. Lenders should obtain an
affirmative certification from the institution of higher education that the loan amount
does not exceed student need.

As we discuss in this study, students currently complete a “self-certification” form.
This additional paperwork may not spur meaningful conversation between schools and
students about various grant and loan options that may have more favorable terms. A
wide number of industry and student advocates have expressed support for schools
playing a greater role in this process than is presently contemplated by the statute.

    86            PRIVATE STUDENT LOANS
A potential solution might leverage the use of existing electronic networks among
lenders and schools – replacing self-certification with mandatory certification like that
formerly used in the FFEL program.

II. DETERMINE WHETHER CHANGES ARE NEEDED TO THE TREATMENT
OF PRIVATE STUDENT LOANS IN BANKRUPTCY PROCEEDINGS.

Federal student loans under Title IV of the Higher Education Act offer significant
options for borrowers facing economic distress, including the ability to cap payments
as a percentage of discretionary income and remain in good standing. While this may
lead to greater total payments over the life of these loans, the borrower can more easily
avoid the economic consequences of delinquency or default.

We heard from many distressed student loan borrowers facing trouble making
payments on private student loans due to limited options for alternate payment
options. Consumers, as well as businesses, have been able to restructure other types of
debts through bankruptcy as a last resort.

But with less guaranteed flexibility compared to federal loans and very limited
bankruptcy options compared to other consumer loans, private student loan borrowers
facing tough economic times may be challenged to emerge as productive contributors
to our society.

As noted in the report, several bodies were unable to find any systematic abuse of the
bankruptcy code in seeking student loan discharges. Additionally, we were unable to
find strong evidence that the 2005 changes to the bankruptcy code caused prices to
decline or access to credit to increase significantly. If Congress concludes that the
2005 changes did not meet their overall policy goals, it would be prudent to consider
modifying the code in light of the impact on young borrowers in challenging labor
market conditions.

III. CONSIDER MODERNIZING AND CLARIFYING THE DEFINITION OF A
PRIVATE STUDENT LOAN UNDER THE TRUTH-IN-LENDING ACT.

Currently, the law generally defines a private student loan as a closed-end loan for
postsecondary expenses not borrowed through programs under Title IV of the Higher
Education Act.

However, there are other student loan programs issued by the federal government.
For example, the Department of Health and Human Services offers loans to students
pursuing health professions. These loans do not appear to involve the policy issues
that prompted the addition of consumer protections in the past decade to private
student loans.

On the other hand, there may be other products in the marketplace that serve as
economic substitutes (such as lines of credit for postsecondary expenses) that do not
meet the statutory definition, but may require a similar disclosure and consumer
protection framework. Congress may wish to clarify these definitions to enhance
consumer clarity and ensure a competitive, level playing field.


    87            PRIVATE STUDENT LOANS
IV. PROVIDE MECHANISMS FOR BORROWERS TO UNDERSTAND A
COMPLETE PICTURE OF THEIR STUDENT LOANS.

 Input received from industry, schools, and consumers, reveals that many borrowers
appear to view federal and private student loans as direct economic substitutes. Many
borrowers do not have a clear understanding of the key differences between these
loans. This leads to a further problem: because many borrowers have both types of
loans from the same lender, many borrowers are confused about how much they owe
and to whom, even as they decide whether to take on more debt for additional years in
school.

Borrowers are able to determine their full set of federal student loan obligations by
accessing the National Student Loan Data System (NSLDS). No such centralized,
publicly-accessible system exists for borrowers of private student loans. Congress
should explore how it can facilitate greater transparency of existing obligations and
promote borrower understanding of their total debt obligations.

V. DETERMINE WHETHER ADDITIONAL DATA IS NEEDED TO
ENHANCE CONSUMER DECISION-MAKING AND LENDER
UNDERWRITING.

In order to make informed decision-making on appropriate levels of student debt,
consumers need more and better information about post-graduation outcomes, such as
employment and wage expectations by program of study, before they decide on which
school to attend or continue attending.

The lack of data also impacts lenders. The scarcity of publicly-available data may
contribute to the use of indicators such as cohort default rate and graduation rates in
underwriting. While these may serve as proxies for expected outcomes, they may be
far inferior to actual expected outcomes for the purpose of underwriting. Additional
outcome data might also give the public and federal regulators greater confidence that
underwriting is in compliance with the nation’s fair lending laws.




    88            PRIVATE STUDENT LOANS
RECOMMENDATIONS OF THE SECRETARY
OF EDUCATION
I. WE RECOMMEND THAT CONGRESS REQUIRE INSTITUTIONS OF
HIGHER EDUCATION AND PRIVATE EDUCATION LENDERS TO WORK
PROACTIVELY TO PROTECT AND INFORM PRIVATE STUDENT LOAN
BORROWERS.


         •   Require institutions of higher education to determine whether a private
             education loan borrower has exhausted his or her eligibility for Federal
             student aid and to certify a borrower’s need for a private education loan
             before a private education lender issues the loan.

Some private student loan borrowers do not apply for Federal student aid, and many
private student loan borrowers do not exhaust their Federal student loan limits.
Because the terms and conditions of a private student loan are almost never as
beneficial to a borrower as a title IV loan, it is important that students turn first to
Federal student loans and other Federal aid to finance their higher education. We
recommend that Congress require institutions to determine whether private loan
borrowers have applied for and exhausted their eligibility for Federal aid, and if they
have not, to disclose to borrowers their possible eligibility for Federal student aid, the
terms and conditions of such aid, and that eligibility for Federal aid should be
exhausted before borrowing a private education loan. We further recommend that the
disclosure include an affirmation, signed by the borrower that the borrower has
received the above information and that the borrower has exhausted his or her
eligibility for Federal student aid or that the borrower has intentionally declined to
either apply for Federal student aid or exhaust eligibility. Requiring a signed disclosure
will ensure that borrowers are aware of and receive information about Federal student
aid and that the financial aid office at the institution has a more complete picture of the
borrower’s educational financing and can counsel the borrower appropriately.

We also recommend that Congress require an institution that has accepted the
borrower for enrollment to certify all private education loans, which would consist of
verifying a student’s enrollment, private student loan amount, and that the institution
has determined that the amount of loan requested does not exceed the amount of the
applicant’s qualified educational expenses net of Federal or other student financial
assistance available or awarded to the applicant. We recommend requiring that the
private lender obtain this certification from the institution before making a private loan
and that the loan amount not exceed the amount certified by the institution.

While the current trend in private education lending is for the school at which the
borrower is enrolled to certify a borrower’s need for a private education loan, there is
no guarantee that the direct-to-consumer (DTC) loan market of the near past will not
reemerge as the economy improves. We believe that institutional certification of
private education loans will cap the annual loan amount at cost of attendance less aid
received and protect borrowers from overborrowing. As noted in the Consumer


    89            PRIVATE STUDENT LOANS
Protection narrative in Part Three of this report, public commenters from all
constituencies suggested that institutional certification of a private education loan
should be required by law as a prerequisite to the making of a private student loan.


         •   Require lender disclosures on the availability of Federal student aid.

As noted above, it is critical that students and their families know that Federal student
financial aid is available to finance higher education, most often with more generous
terms, conditions, and repayment options than private student loans, and that they
should only consider obtaining a private education loan if they have exhausted their
eligibility for Federal grants, work-study, and loans, as well as State and institutional
grants and scholarships where available. We recommend that Congress require private
education lenders, before a private education loan is issued, to disclose to the borrower
his or her possible eligibility for Federal student aid, the terms and conditions of
Federal aid, that the borrower should exhaust his or her eligibility for Federal student
aid before borrowing a private education loan, and that the borrower should contact
the financial aid office at the school at which the borrower is enrolled for more
information. Requiring private education lenders to make these disclosures before the
loan is issued will ensure that a borrower is aware of and receives information about
Federal student aid and will reinforce the notion that maximizing Federal student loans
and other aid before borrowing a private education loan is more beneficial to the
borrower.

II. WE RECOMMEND THAT CONGRESS WORK WITH THE CFPB AND
THE DEPARTMENT OF EDUCATION TO DETERMINE HOW TO AFFORD
GREATER FLEXIBILITY AND/OR RELIEF TO PRIVATE STUDENT LOAN
BORROWERS WHO ARE EXPERIENCING FINANCIAL DISTRESS,
INCLUDING POTENTIAL CHANGES TO THE TREATMENT OF PRIVATE
STUDENT LOANS IN BANKRUPTCY PROCEEDINGS.

Private student loans do not offer any of the debt management or mitigation options
enjoyed by Federal loan borrowers, such as a variety of flexible repayment plans,
forbearance options, and contractual rights to periods of loan deferment,
rehabilitation, and forgiveness opportunities. These options, which extend for the life
of a borrower’s Federal student loan, provide relief from economic hardship for
borrowers in extreme financial distress. Moreover, since 2005, private education loans
are not dischargeable in bankruptcy unless the borrower can demonstrate undue
hardship (like Federal student loans), an extremely difficult standard to meet.

The absence of consumer protections on private loans comparable to that available on
Federal student loans, combined with the current restriction on bankruptcy discharge,
leave those private student loan borrowers who face extreme financial distress with no
last resort for economic relief, even in dire circumstances, such as borrower death on
cosigned loans. The impact of having no last resort relief for private student loan
borrowers is reflected in the relatively higher loan default rate among those borrowers
that received a private student loan in the mid-2000s — a time when private loan


    90            PRIVATE STUDENT LOANS
marketing was particularly aggressive and underwriting standards were less stringent
than today.

In commissioning this report, Congress tasked the CFPB and the Department to
examine the consumer protections available on private student loans, as well as their
terms, conditions, and pricing. Based upon the substantial data provided in this report,
and as the CFPB’s recommendations note, there is no strong evidence that the 2005
changes to the bankruptcy code caused prices to decline or significantly increased
access to credit. Nor did analysis by others find evidence of systematic abuse of the
bankruptcy code in seeking student loan discharges when such an opportunity was
more widely available.

Therefore, Congress should work with the CFPB and the Department of Education to
determine what safeguards are adequate to ensure that students’ and families’ pursuit
and attainment of postsecondary education, including when financed through the use
of credit beyond Federal loans, do not jeopardize borrowers’ ability to recover from
severe financial distress. This determination should weigh the relative impact of
providing student loan consumers with flexibility and relief—including forbearance,
deferment, income-based repayment options, defaulted loan rehabilitation, and
modifications to bankruptcy discharge provisions—with the potential that such
safeguards may lead to higher prices or more stringent underwriting standards.

III. WE RECOMMEND THAT CONGRESS AMEND THE DEFINITION OF
PRIVATE EDUCATION LOAN TO EXCLUDE OTHER FEDERAL
EDUCATION LOANS.

We agree with the CFPB that the definition of private education loan should exclude
Federal education loans such as health profession loans made by the Department of
Health and Human Services. Should Congress decide to change the law, we also
recommend that Congress consider excluding only private education loans made by
eligible not-for-profit holders as long as the following controlling factors are mandated
to protect borrowers: a ban on price discrimination based on a borrower’s credit
worthiness; a requirement that repayment safety nets such as deferment, forbearance,
and income-based repayment are included in the terms and conditions of the loan; and,
a mandate that loan forgiveness be provided for public service such as teaching,
nursing, and social work.

IV. WE RECOMMEND THAT THE DEPARTMENT OF EDUCATION AND
THE CFPB WORK WITH CONGRESS TO IDENTIFY THE NECESSARY
RESOURCES TO PROVIDE A COMPREHENSIVE PICTURE OF STUDENT
BORROWING THAT IS INCLUSIVE OF BOTH FEDERAL AND PRIVATE
STUDENT LOANS. THE ABILITY FOR A BORROWER TO ACCESS THIS
INFORMATION IN A CENTRALIZED WAY WOULD HELP FACILITATE
BETTER DEBT MANAGEMENT AND IMPROVED FINANCIAL DECISION
MAKING.

While student borrowers can access information about their individual federal student
loan borrowing through the National Student Loan Data System (NSLDS), private

    91            PRIVATE STUDENT LOANS
student loan borrowers have no such comparable resource. Additionally, there is no
comprehensive resource that allows a complete picture of borrowers’ student loan debt
inclusive of all of their educational debt obligations.

We encourage the Department and the CFPB, working with Congress, to establish a
centralized, publicly accessible, privacy–protected system for borrowers to access
private student loan data that is comparable and compatible with ED’s NSLDS. The
information in NSLDS is a critical resource in the Department’s management and
operation of the title IV loan programs and facilitates ED’s oversight and enforcement
efforts as well. NSLDS underpins the efforts of our Student Loan Ombudsman in
helping borrowers work through the problems they encounter in repayment and helps
to ensure that student loan borrowers are aware of their Federal debt levels. Private
lenders and private loan borrowers would be well-served by a comparable and
compatible resource like NSLDS.




    92            PRIVATE STUDENT LOANS
Data Appendix I: Further
Information About Data
Sources

MERGE METHODOLOGY
DATA SOURCES


         •   Lender Loan Level Origination Data (Loan-Level Data)
         •   Integrated Post-Secondary Educational System (IPEDS)
         •   Postsecondary Education Participants System (PEPS)
         •   Consumer Price Index-All Urban Consumers (CPI-U)


PROCEDURE
In order to obtain additional detail about school characteristics the loan-level data was
merged with the IPEDS and PEPS data for corresponding years. The CPI was merged
to the loan-level data in order to inflation adjust dollar values such as tuition and fees
and original balances.

The relevant IPEDS was downloaded as custom datasets from the IPEDS Data Center
(http://nces.ed.gov/ipeds/datacenter/ ) between March 14, 2012 and April 10, 2012
for academic years 2004 through 2011 (the 2011 data was early release data at the time
it was downloaded). While OPEID is a variable in IPEDS, it is not reported by all
institutions in all years.

For each school, tuition and fee variables were created for in-state and out-of-state
students for each type of program by summing tuition and fees for each type of

    93            PRIVATE STUDENT LOANS
program (for schools that only reported a comprehensive fee this was taken to be the
tuition and fee value) using the tuition1-tuition7, fee1-fee7, and cmpfee1-cmpfee3 for
undergraduate and graduate students. For medical students, instate tuition and fees
were constructed using isprof3, ispfee3, osprof3, and ospfee3, and similarly, for law
students, tuition and fees were constructed using isprof9, ispfee9, osprof9, and osfee9.
These variables are only available through the 2010-2011 academic year. For
undergraduates, published tuition and fees are available through the 2011-2012
academic year, and are constructed as separate variables using chg2ay3, cmp2ay3,
chg3ay3, and cmp3ay3.

A crosswalk between IPEDS unitid and OPEID was created by taking the first non-
missing OPEID associated with a particular school as the OPEID of the school if it
was not reported in a given year. For the 53,717 school-year pairs in the IPEDS
sample, this crosswalk updated OPEID in 24,415 (45.5%) of the records.
Retrospective IPEDS data, such as enrollment and average tuition, was assigned to
quarter of origination based on reporting year (fyrpyear) for academic years 2004-2005
through 2009-2010: for a July 1 through June 30 calendar year quarters 1 and 2 of the
survey year were assigned an origination year the same as the survey year and quarters
3 and 4 were assigned to an origination year a year earlier than the survey year; for
institutions with a September through August reporting period, quarters 1, 2, and 3
were assigned to the same origination year as the survey year and quarter 4 was
assigned to an origination year a year earlier than the survey year. For 2010 and 2012,
all institutions conform to a July 1 through June 30 calendar year. A dataset was then
created The IPEDS dataset was merged with the loan-level data using 8-digit OPEID
and quarter of origination, resulting in a match for 4,710,426 (86.3%) of the loan-level
records and additional matching on 6-digit OPEID and quarter of origination resulted
in 1 additional match. Records that did not match include consolidation loans; loans
for foreign institution and other non-IPEDS reporting schools such as extension
schools and test-prep programs; and schools that may have been miscoded and that
could not be matched on name because of non-standard spelling. Once the merge was
completed a borrower’s relevant tuition and fees were calculated based on in-state
status (a student is classified as in-state if the state in which his school is located and
the state reported in the loan-level data matched; he is classified as out-of-state
otherwise), and the corresponding in-state and out-of-state tuition and fees.

The loan-level dataset was also merged to the PEPS data provided by the third party
aggregator (which they also used to verify OPEID) in order to add institutional
variables that are not available in the IPEDS data, such as foreign institution status.
This resulted in a match of 4,960,358 (90.9%) of the loan level records. All records that
merged successfully with IPEDS also merged successfully with PEPS.

In order to inflation-adjust variables such as original loan balances and tuition and fees,
the loan-level was also merged with the half-yearly CPI-U data on origination quarter
where the first two quarters of a calendar year were attributed to the 1st half and the
last two quarters of a calendar year were attributed to the second half. For all inflation-
adjusted values, the base half-year is the second half of 2011.




    94             PRIVATE STUDENT LOANS
In the loan level data, program type was imputed for records with missing values
where the borrower reported attending the same educational institution in the record
that immediately chronologically precedes the record with the missing value by
attributing the next earliest non-missing response of program type for that borrower-
lender pair at that institution. As a result of this procedure, program type was imputed
in 40,539 records.




    95            PRIVATE STUDENT LOANS
Data Appendix II:
Additional Figures And
Tables
APPENDIX FIGURE 1: DISTRIBUTION OF INTEREST RATE INDICES BY
PROGRAM TYPE (SAMPLE LENDERS)




  96        PRIVATE STUDENT LOANS
Source: Sample lender loan level data
Please note that T-bill based indices have largely disappeared as of the 2011-2012
academic year while fixed-rate offerings are just beginning to appear in undergraduate
offerings in the Sample Lender loan level data. The key indices that persist through the
Sample time period are Prime, and both LIBOR indices.


APPENDIX FIGURE 2: DISTRIBUTION OF ORIGINAL INTEREST RATE
BY PROGRAM TYPE (ACADEMIC YEAR BASIS) (SAMPLE LENDERS)




Source: Sample lender loan level data
The two horizontal red lines in the figure correspond to the 6.8% fixed interest rates on
federal Stafford loans and the 7.9% interest rate on federal Direct PLUS loans, both
applicable as of this writing. Appendix Figure 3 presents box plots of the margin over the
index used to compute interest rates by program type and year. Appendix Figure 4
presents box plots of the margin over the index used to compute interest rates by the
index used. The variable-rate loan contracts used by PSL lenders compute interest at a rate
that is reset periodically by adding the current value for the Index (such as the Prime Rate)
plus a fixed “margin.” The higher the margin, the higher the interest rate will be.




    97             PRIVATE STUDENT LOANS
APPENDIX FIGURE 3: DISTRIBUTION OF MARGIN TO INDEX BY
PROGRAM TYPE (ACADEMIC YEAR BASIS) (SAMPLE LENDERS)




Source: Sample lender loan level data




    98            PRIVATE STUDENT LOANS
APPENDIX FIGURE 4: DISTRIBUTION OF MARGIN BY INDEX
(ACADEMIC YEAR BASIS) (SAMPLE LENDERS)




Please note that in each of the three key indices, Prime and both LIBOR (key in that they
persist through our Sample period) margins rose during the financial crisis of 2008 and
subsequently declined to a lower, but elevated (relative to the pre-crisis period) level.




    99             PRIVATE STUDENT LOANS
APPENDIX FIGURE 5: CHANGE IN INITIAL REPAYMENT CHOICE
BEHAVIOR BY ACADEMIC PROGRAM (CALENDAR YEAR) (SAMPLE
LENDERS)




Source: Sample lender loan level data




    100            PRIVATE STUDENT LOANS
APPENDIX FIGURE 6: SUPPLEMENTAL DATA FROM PART FOUR –
DEMOGRAPHIC DISTRIBUTION BELOW/ABOVE CDR THRESHOLD.212




  101       PRIVATE STUDENT LOANS
102   PRIVATE STUDENT LOANS
APPENDIX FIGURE 7: SUPPLEMENTAL DATA FROM PART FOUR –
ODDS RATIOS FOR THRESHOLD CDRS (2007 – 2008)213




	
                        	
  




       103   PRIVATE STUDENT LOANS
Student Loan Glossary
                            Generally refers to provisions in the Higher Education Act that prohibit
ANTI-INDUCEMENT RULES       lending arrangements where a student lender provides benefits to a school in
                            exchange for considerations such as referral of increased loan volumes.


                            The creation of a financial instrument by combining a pool of loans
                            (assets) and then selling different tiers of securities to investors who are
                            repaid out of the receipts from the financial assets. In general, a sponsor of
                            the transaction sells loans or other assets to a bankruptcy-remote trust. The
                            trust is technically the “issuer” of asset backed securities, although the
                            sponsor is sometimes referred to by that term. The “investors” are the
                            parties who purchase the securities (typically bonds or notes) issued by the
                            trust. The process can encompass any type of financial asset and promotes
ASSET-BACKED                liquidity in the marketplace. By combining loans into one large pool,
SECURITIZATION              an issuer can divide the cash flows from the large pool of assets into smaller
                            pieces and sell those smaller pieces to investors. Securitization creates
                            liquidity by enabling smaller investors to be able to purchase cash flows from
                            portions of larger pools. Assets typically placed into ABS securities include
                            auto loans and leases, credit card receivables, and both federal and private
                            student loans. The structuring of cash flows through securitization, i.e. the
                            different terms governing how much and when cash is paid out to the
                            investors, allows the market to separate different forms of risk (for example,
                            interest rate and credit risk) associated with the same pool of loans.


BPS OR BASIS POINTS         One basis point is equal to one one-hundredth of one percent or 0.01%




  104        PRIVATE STUDENT LOANS
                              Measured by the Department of Education: the percentage of a school's
                              borrowers who enter repayment on certain Federal Family Education Loan
                              (FFEL) Program or William D. Ford Federal Direct Loan (Direct Loan)
COHORT DEFAULT RATE
                              Program loans during a particular federal fiscal year (FY), October 1 to
                              September 30, and default or meet other specified conditions prior to the
                              end of the next fiscal year.


                              With regard to an Asset-Backed Securitization, collateralization ratio is the
COLLATERALIZATION
                              ratio of trust assets (loans sold to the trust plus cash accounts) to trust
RATIO                         liabilities (notes sold by the trust). May also be called a parity ratio.


DEPOSITORY INSTITUTION        Private student lenders who hold a charter to accept deposits (i.e. banks and
LENDERS                       credit unions).


                              Unlike school-certified private student loans, direct-to-consumer student
                              loans are typically not certified by a school’s financial aid office. In the
DTC OR DIRECT-TO-
                              certification process, a school’s financial aid office will communicate with a
CONSUMER                      lender (usually electronically) to verify a student’s enrollment status at the
                              school as well as financial need levels.


                              With regard to an Asset-Backed Securitization, the excess spread refers to the
                              remaining income after all required expenses and other payables, including
EXCESS SPREAD
                              required interest and principal payments, have been satisfied; it is the “net
                              interest income” of the structure.


                              Federal law, such as the Equal Credit Opportunity Act, prohibits
FAIR LENDING                  discrimination in credit transactions based on factors such as race or color,
                              religion, national origin, sex, marital status, and age.


                              Money borrowed directly from the U.S. Department of Education to help
                              cover the cost of higher education at a participating post-secondary
                              institution. Requires the completion of a FAFSA or Free Application for
FEDERAL STUDENT LOANS
                              Federal Student Aid. The Department of Education is now the sole lender
                              for the Direct Stafford Loans and Direct PLUS Loan (Direct Loan)
                              programs. Please see http://studentaid.ed.gov/	
  	
  




  105          PRIVATE STUDENT LOANS
                             Stands for Fair Isaac Corporation, a purveyor of credit scoring algorithms
                             and methodologies. Many consumers refer, correctly or incorrectly, to their
                             credit score as a FICO score. FICO is only one subset of proprietary credit
                             scores. Lenders use credit scores to assess an applicant's credit risk and
FICO
                             whether to extend credit. Credit scores take into account factors such as
                             payment history, indebtedness level, types of credit used, length of credit
                             history, and number of new credit inquiries to assess credit risk. In general,
                             FICO scores range between 300 and 850.


                             Since 2006, all federal student loans have carried a fixed interest rate. Some
FIXED-RATE                   private student loans carry a fixed interest rate as well. The interest rate is set
                             at the time of origination and does not change throughout the life of a loan.


                             A temporary cessation of payments granted by a lender or servicer typically
FORBEARANCE                  when a borrower encounters temporary reduction in his ability to repay a
                             student loan


                             Refers to a schedule of payments under which a borrower does not make
                             payment toward principal and/or interest while in a qualifying period. While
                             student loan borrowers are in school, their loans are typically deferred,
                             meaning that payments of both principal and interest are not due to begin
FULL DEFERMENT               until the borrower separates (transfer, graduate, drop-out, or otherwise leave)
                             from school. After a deferral period ends, there is typically a grace period of
                             six (6) months before payments are due. While terms and conditions vary
                             for private student loans, the Department of Education (ED) has published a
                             list of the reasons qualifying for a deferment. http://studentaid.ed.gov/


                             An available federal student loan repayment program that allows borrowers
                             to limit the amount repaid each month based on the borrower’s income.
INCOME-BASED
                             Borrowers must qualify based on factors such as income, family size, and
REPAYMENT                    state of residence. The Department of Education has more information
                             about IBR http://studentaid.ed.gov/	
  


                             London Interbank Offered Rate; the interest rate at which banks can borrow
                             funds from other banks in the London interbank market. LIBOR is fixed on
LIBOR                        a daily basis by the British Bankers' Association. There are different LIBOR
                             rates for different terms. Variable-rate PSLs often use 30 day or 90 day
                             LIBOR as an index to reset rates.


                             Some private student lenders operated and originated loans without a bank
NON-BANK ORIGINATORS         charter. For example, a lender could purchase loans from a bank who
                             originated loans under a forward purchase contract with the non-bank
                             lender. The non-bank lender may have prescribed the types of loans that it


  106         PRIVATE STUDENT LOANS
                           was willing to purchase or in some cases may have helped set the credit
                           policy to determine which loans a bank originator would make for sale. See
                           also Depository Institution Lenders.


                           A fee charged when a loan is made to a borrower. Origination fees are
                           typically charged to cover a lender’s cost of processing an application and
ORIGINATION FEES
                           disbursing funds to a customer. Origination fees are usually included in the
                           loan amount.


                           The aggregate group of loans granted to borrowers in a given period (for the
ORIGINATION VINTAGE
                           purposes of this Report, usually a calendar or academic year).


                           With regard to an Asset-Backed Securitization, overcollateralization refers to
                           the amount by which the assets (the collateral) pledged by a securitization
OVERCOLLATERALIZATION      trust exceed the principal value of the liabilities issued. The additional
                           collateral represents additional security for the note holders and typically
                           functions as a credit enhancing feature.


                           Any loans made for post-secondary education that are not federal student
                           loans. The term excludes 12 month payment plans that do not charge
                           interest on short-term balances due to schools. Unlike federal student loans,
PRIVATE STUDENT LOANS
                           the interest rate and fees paid on a private student loan are based on a
                           borrower’s and/or co-signer’s current creditworthiness, as tested at the time
                           of application.


SECONDARY MARKET           A market where investors can purchase or trade securities or assets


SLABS                      Student Loan Asset-Backed Security; See Asset-Backed Securitization


TALF OR TERM ASSET-        A program established by the Federal Reserve in November 2008 to assist in
BACKED SECURITIES LOAN     the issuance of asset-backed securities as investor liquidity in the ABS market
FACILITY                   had waned. The program ended in 2010.




  107       PRIVATE STUDENT LOANS
                            Some non-profit, state-affiliated private student lenders issue either revenue
                            bonds or asset-backed securities supported by the cash flows from private
TAX-ADVANTAGED BOND
                            student loans made by the lender. In certain circumstances, depending on
FUNDING                     the status of the issuer and the investor, the interest paid on bonds issued by
                            state-affiliated entities is exempt from federal and/or state income taxation.


                            TERI stands for The Education Resources Institute, a Massachusetts non-
TERI-GUARANTEED             profit corporation that, prior to its bankruptcy in 2008, provided loan default
SERVICING GUIDELINES        insurance or guarantees covering private student loans that were originated
                            according to TERI’s guidelines and policies. See note [20].


                            Guidelines established to ensure that safe and sound loans are issued and
                            maintained. Credit underwriting standards, sometimes called a credit policy,
UNDERWRITING (CREDIT)       typically set benchmarks for how much may be lent to a person, the terms,
STANDARDS                   conditions and purposes of a loan, and what interest rate will be charged.
                            For consumer credit, lenders often consider credit score, credit reports,
                            income, employment, and the assets of a debtor.


                            Many private student loans have variable interest rates, meaning the interest
                            rate can change from time to time over the life of a loan. Variable interest
                            rate loans are tied to an index, such as LIBOR or the Prime rate. When the
                            index changes (up or down) the underlying interest rate of a loan changes.
VARIABLE-RATE               Rates may reset monthly, quarterly or even semi-annually. A margin is added
                            to the current index value to determine the total interest rate for the loan.
                            The margin is set at the time of origination and varies based on the credit
                            worthiness of a borrower. This variation in margin value is one way that a
                            creditor might establish “risk-based” pricing.




  108        PRIVATE STUDENT LOANS
References and Notes
1
    As used in this Report, the term “private student loan” is defined by reference to section
140 of the Truth in Lending Act (15 USC § 1650). That term excludes short term credit
advanced by schools (90 days or less) and payment plans of 12 months or less that do not
involve periodic interest charges. This Report does not cover these common short-term
financing methods.

2
    Section 1077 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

3
    The CFPB and the Department of Education would like to express their gratitude to the 9
participating lenders for their willingness to participate in this data collection effort, not
only for the meaningful information that they shared voluntarily, but also because of the
compressed time-frame over which the parameters of the data request were defined and
agreed to and the promptness of the data delivery. The participating lenders included:
RBS Citizens N.A., Discover Financial Services, The First Marblehead Corporation,
JPMorgan Chase Bank, N.A., PNC Bank, N.A., Sallie Mae, Inc., SunTrust Banks, Inc., U.S.
Bank National Association, and Wells Fargo Bank, N.A.. The information was provided
under a non-disclosure agreement and is protected under various federal laws as
proprietary and confidential business information.

4
    We note that credit unions typically participate through joint platforms, such as Fynanz
(cuStudentLoans), Credit Union Student Choice. These loans are held on credit union
balance sheets and are playing a larger part in the PSL marketplace as some large banks
have recently reduced their involvement in the market.

5
    The College Board, Trends in Student Aid 2011, p. 10; State Lender Data

6
    Federal loans made up 39% of student aid received by undergraduates and 69% of total
graduate student aid. Federal grants constituted 27% of grants on which undergraduates


       109             PRIVATE STUDENT LOANS
relied and 2% of graduate student aid. Tax credits added another material portion of aid.
Thus, the federal government provides more than 2/3 of the direct aid to all post-
secondary students. See The College Board, Trends in Student Aid 2011, p. 11.

7
    The College Board, Trends in Student Aid 2011, p. 13.

8
    Parents may obtain a federal parental PLUS direct loan without completing a FAFSA.

9
    Sallie Mae and Ipsos Public Affairs, How America Pays for College 2011, p. 6 “This is an
increase of 8% over prior years, mostly amongst upper income students.”

10
     “Private education loans are designed to bridge the gap between family resources,
scholarship and grants, federal loans and the cost of a college education.” Sallie Mae.
Primer on Private Education Loans. Accessed on 12 Jun. 2012, available at
https://www1.salliemae.com/about/news_info/primer%20on%20private%20education%2
0loans.htm


“Students finance their postsecondary education by means of family contributions, federal
loans, grants and work-study, state grants, institutional grants and loans and, sometimes,
outside scholarships. When these sources of funding do not add up to the full amount
needed, some students turn to private loans. Other students may not have a pressing
financial need and may bypass need-based financial aid resources in favor of a private
loan. Thus, paradoxically, for some individuals, private student loans are a resource of
necessity, whereas for others they serve as a resource of convenience.” USA Funds, Guide
to Student Loan Issues. Accessed on 12 Jun. 2012, available at
http://www.usafunds.org/Media/Reports%20and%20White%20Papers/GuideStudentLoan
Issue.pdf


     34 C.F.R. §682.200(b)(i)); 34 C.F.R. 673.5(d)).	
  Recapture may in fact be rare, because a
11


financial aid office that learned of overborrowing by a federal aid recipient likely would
counsel the student to cancel the excess portion of the PSL. Most PSL lenders allow
cancellation (partial prepayment) without interest or penalty for a period of time after
disbursement. Even if federal aid recapture is purely a theoretical risk, the effect of
borrowing substantially more than is needed for a particular degree can be quite severe,
as demonstrated in the default rates for DTC loans (see text at Note 51).

12
     20 USC §1078-8 (d)(3)(B).

13
     20 USC §1078-8.

14
     Federal loan limitations have changed frequently in the past decade, as set forth in the
following table:




       110             PRIVATE STUDENT LOANS
 DATES                               ANNUAL LIMIT                   LOAN PROGRAM                      AUTHORIZING STATUTE

 January 1, 1987 to June 30, 2007    $2,625- First-Year Borrowers   Dependent Undergraduate            1986 HEA Amendments (P.L.
                                                                    Subsidized Stafford                         99-498)

 October 1, 1993 to June 30, 2007    $3,500- Second Year            Dependent Undergraduate
                                                                    Subsidized Stafford
                                     $5,500- Third or more

 October 1, 1993 to Present          COA minus EFA                  Federal PLUS (Parent)

                                     $6,625- First Year             Independent Undergraduate Total
                                                                    (Sub. & Unsub.) Stafford           1992 HEA Amendments (P.L.
                                     $7,500- Second Year                                                       102-325)
     July 1, 1994 to June 30, 2007
                                     $10,500- Third or more

                                     $8,500- Subsidized Grad        Graduate Subsidized Stafford


 July 1, 1994 to June 30, 2012       $18,500-Total Grad             Graduate Total Stafford

 July 1, 2007 through Present        $3,500- First Year             Dependent Undergraduate
                                                                    Subsidized Stafford
                                     $4,500- Second Year

                                     $5,500- Third or more

                                     COA minus EFA                  Graduate PLUS Loans

                                                                                                      Higher Education Reconciliation
 July 1, 2007 through June 30,       $8,500 Subsidized Grad         Graduate Stafford
                                                                                                        Act of 2005 (P.L. 109-171)
 2012
                                     $20,500- Total Grad

 July 1, 2007 through June 30,       $7,500- First Year             Independent Undergraduate Total
 2008                                                               Stafford
                                     $8,500- Second Year

                                     $10,500- Third or more

 July 1, 2008 through Present        $9,500- First Year             Independent Undergraduate Total
                                                                    Stafford                           Ensuring Continued Access to
                                     $10,500- Second Year                                             Student Loans Act of 2008 (P.L.
                                                                                                                 110-227)
                                     $12,500- Third or more

 July 1, 2012 through Present        N.A.- Subsidized Grad          Unsubsidized Graduate PLUS
                                                                    Loan
                                     $20,500- Unsub Grad                                                Budget Control Act of 2011

                                                                                                               (P.L. 112-25)




15
     20 U.S.C. § 1078(b), (c). The guarantees were issued by state guaranty agencies, but
reinsured by the Department.

16
 20 USC §1087-1.




       111                PRIVATE STUDENT LOANS
17
     20 USC §1085(d)(3).

18
     The situation changed with the enactment of the Higher Education Opportunity Act of
2008. That Act imposed code of conduct requirements on schools that prohibit cozy
relationships with lenders, as well as imposing stringent requirements on any school who
wishes to recommend a private lender. See section 487(e)(5) of the Higher Education Act
(20 USC § 1094(e)(5)). Disclosure and process rules for adopting a “preferred lender
arrangement” are now required under sections 152 and 153 of the Act (20 USC § 1019a &
1019b). Technically speaking, PSLs and FFELP referrals could never be explicitly tied in
together. The HEOA amendments imposed procedures and disclosures to assure that
implied quid pro quo relationships are prohibited.

19
     The ELM Resources platform, originally created by a consortium of lenders and schools,
supported both Stafford and PSLs. www.elmresources.com/ourstory

20
     The PSL industry even generated its own private version of the federal loan guaranty,
the non-profit private student loan guaranty company. For example, in 1985 the
Massachusetts loan guaranty agency, now known as American Student Assistance, and
several Massachusetts schools, formed a non-profit known as The Education Resources
Institute, Inc. (“TERI”). TERI offered to provide private credit enhancement to banks that
would make loans to students to attend approved schools. TERI dictated the underwriting
criteria and eventually went into the loan origination business for loans it guaranteed. In its
heyday, TERI guaranteed over $16 billion in PSLs. TERI Form 1099 (June 30, 2007). TERI
filed a petition under Chapter 11 of the U.S. Bankruptcy Code in April 2008 and has since
returned to its original mission of providing college access counseling.

21
     PLUS Parent loans have obvious and significant differences as compared to Stafford
loans. PLUS loans are loans to parents, not students. They do not require a FAFSA. They
require evidence of creditworthiness. They do not have repayment modification rights.

22
      20 U.S.C. § 1078(b)(1)(M), 1078-8(e).

23
     There are minor proxies for ability to repay. The student cannot have an unresolved
defaulted student loan, 20 U.S.C. §1091(a)(3). If a school’s “cohort default rate,” meaning
the rate at which students in each group going into repayment on Stafford loans default
within the first two years, exceeds statutory levels, the school will not be able to participate
in Title IV. The threshold is very high at 25% average default over 3 successive years and
40% in any one year. The measurement will soon change to three-year default rate and the
percentage thresholds will also change. 20 U.S.C. §1085(a)(2)

24
     Sample Lender qualitative responses.




       112             PRIVATE STUDENT LOANS
25
     The exceptions to this statement are rates offered by state-affiliated lenders, who offer a
single, fixed rate. These lenders are discussed at the end of Part One.

26
     The 3.4% fixed rate is limited to one lender and varies greatly from the best rate for all
others. It may reflect pricing based on a larger banking relationship with the co-signer.

27
     20 USC § 1078-6(a), 1078-3(a).

28
     20 USC § 1078-6(a)(1)(C).

29
     Sample Lender qualitative data.

30
     Part Three, TILA discussion.

31
     Note that 2005 initial rates reflect pricing that is generally lower than that offered today,
in terms of the margins used to compute variable rates.

32
     The College Board, Trends in Student Aid 2011.

33
     Most of the lenders in the sample group use deposits and sources of funds typical for
depository institutions to fund loans. Sallie Mae reports that it remains an active participant
in the securitization market.

34
     Collateralization Ratio - With regard to an Asset-Backed Securitization, collateralization
ratio is the ratio of trust assets (loans sold to the trust and other cash accounts) to trust
liabilities (notes sold by the trust). May also be called a Parity Ratio, see Glossary.

35
     One rating agency explained in 2006: “Although most PSL ABS transactions have a
parity ratio of 100% at closing, some transactions may have less. This situation can occur
when securitization proceeds are used to cover transaction costs or when the loan
collateral is acquired at a premium. A transaction parity ratio of less than 100% at closing is
permitted as parity ratios or overcollateralization can be built up through: (1) excess
spread, which typically is high for PSL collateral (see Excess Spread section), and (2) the
inclusion of a “lock out” period for subordinate note principal payments (see Step-Down
Date section for further details).” Available at
http://www.dbrs.com/research/207890/rating-u-s-private-student-loan-transactions.pdf


To the extent a trust is undercollateralized, an issuer may be able to extract cash from the
transaction immediately. The following table illustrates one issuer’s use of this technique.
To the extent net bond proceeds exceed loans purchased and pledged the issuer can take
out cash. Additional credit enhancement features include features such as a loan level
guarantee provided by a non-profit (e.g. – TERI, see Note 20) or bond-level or portfolio
wrap insurance (supplied by firms like MBIA, Ambac, Assured Guaranty). Credit


       113             PRIVATE STUDENT LOANS
enhancement allowed issuers to execute deals that varied in their levels of
undercollateralization as of the time of issuance. For example, the parity ratio at issuance
for National Collegiate Student Loan Trust 2007-4 was 98.3%, meaning that the assets
pledged to the trust estate were less than the amount of notes issued by the trust estate or
the trust was undercollateralized by 1.7%. Because of the deferred payment nature of a
large percentage of PSL’s, this trust estate required a $351 million reserve account which
was essentially funds borrowed by the issuance of notes to be able to pay interest on the
notes while the underlying PSL’s were not generating sufficient cash flow. However, PSL’s
accrue interest while in deferment, so parity ratios would continue to move towards
overcollateralization fairly quickly.




                                                                              Loans
  NCSLT          Amount of Bonds         Loans pledged to      Parity Ratio Acquired to
 Issuance            Issued                   trust              at Issue Notes Issued
2004-1              $715,100,000              $572,261,755           98.3%           80.0%
2005-1              $951,500,000              $715,255,787           98.7%           75.2%
2006-1              $900,697,000              $748,421,240           98.5%           83.1%
2007-1             $1,125,300,000             $780,178,586           95.6%           69.3%

                Source: National Collegiate Student Loan T rust Prospectus Supplements




36
     Theoretically, the rating agencies who evaluated SLABS would have served to police
quality issues and align the incentives of investors and issuers. That alignment appears, in
retrospect, to have been imprecise.

37
     During the week of July 10, 2007, S&P, Moody’s, and Fitch announced a series of
downgrades on approximately $5B in subprime MBS, and placed a series of CDO tranches
on negative credit watch. Report of Financial Crisis Inquiry Commission (“FCICR”), page
242 available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.This, along
with rising defaults on the underlying subprime mortgages, triggered the closing of the
ABCP market in August 2007. Report of Financial Crisis Inquiry Commission, page 251-2.
These factors combined to close the ABS markets after July of 2007, as seen in Figure 5.

38
     The College Board, Trends in Student Aid 2011, pg. 10

39
     FCICR, pg 27 – 28.

40
     Sources:



       114              PRIVATE STUDENT LOANS
Moody’s Investors Service “2004 Review and 2005 Outlook: Student Loan-Backed
Securities Another Record Breaking Year” January 11, 2005. Page 3


Moody’s Investors Service 2005 Review and 2006 Outlook: U.S. Student Loan-Backed
Securities” January 16, 2006. Page 5.


Moody’s Investors Service 2005 Review and 2006 Outlook: U.S. Student Loan-Backed
Securities” January 16, 2006. Page 5.


Moody’s Investors Service 2009 Review and 2010 Outlook: U.S. Student Loan-Backed
Securities” January 28, 2010. Page 3.


Moody’s Investor’s Service “Private Student Loan ABS: 2011 Outlook and 2010 Review”
December 7, 2010, Page 8


Moody’s Investors Service “US Private Student Loan Securitizations:2012 Outlook”
                th
December 14 , 2011, Page 1.

41
     The Term Asset Backed Securities Loan Facility (“TALF”) was created by the Federal
Reserve in November 2008 to support the provision of consumer credit by providing
liquidity to the asset backed securities market. The red shaded transaction volume in
Figure 5 is government-assisted.

42
     Sample Lender Data – qualitative responses.

43
     Sample Lender Data – qualitative responses.

44
     Throughout the sample period, all loans for medical and legal programs were school
certified. The proportion of undergraduate educational loans that were school certified
increased from 27.8% in 2008 to 80.1% in 2009. Similarly, the proportion of graduate
loans that were school certified increased from 26.3% in 2008 to 92.9% in 2009.

45
     Please note that total cost of attendance includes tuition and fees, room and board,
books, and transportation and therefore exceeds the cost of tuition and fees alone.
Additionally, considering that our Sample Lender data shows a 40% share of DTC in 2005,
it is probable that the trend toward DTC, non-school certified, PSL lending was already
well underway by the time our sample period started. Also note that because borrowers
cannot be linked across lenders in the loan-level data these values represent within-lender
loan amounts relative to tuition and fees and do not account for amounts individuals
borrowed in an academic year across multiple lenders. Therefore, the amounts used in the
computations may actually understate the ratio of loan amounts to costs.




       115            PRIVATE STUDENT LOANS
46
     Graduate students not at professional schools experienced a change in school
certification level similar to undergraduates, but graduate students did not show a similar
pattern of change in ratio of loan amounts to tuition and fees. The differences may be
attributable to materially higher limits on graduate Stafford loans and, later in the period,
Grad PLUS loans. Please see table at Note 14.

47
     The College Board, Trends in Student Aid 2005 - 2011

48
     Many lenders would base the FICO decision on the highest of available FICOs where
multiple applicants had FICO scores. Within the Sample Lender loan level data, 95.9% of
all educational loans considered at least one FICO score in the underwriting process.

49
     When the Federal Reserve created the TALF program to encourage the return of ABS as
a funding vehicle, the private student loan ABS market rebounded in 2009 with $10.3
billion in total issuance (54% of which was attributable to Sallie Mae, 19% to Student Loan
Corporation and the remainder to a variety of state agencies and non-profits). Sallie Mae
and Student Loan Corporation completed $7.4 billion of this issuance in 5 TALF-eligible
transactions. Sallie Mae accounted for 4 deals for with a total value of $6 billion and
Student Loan Corporation accounted for 1 deal worth $1.4 billion. In 2010, dollar volumes
fell as issuers only sold $7.6B in ABS backed by private student loans. TALF-eligible
volumes were only $2.2 billion in 2010. TALF ended in June 2010.

50
     The reasons involve both accounting rules and transaction economics:


On the accounting side, Sallie Mae reported in its 2011 Form 10-K, p. F-9, “On January 1,
2010, we adopted the new consolidation accounting guidance. Under the new
consolidation accounting guidance, if an entity has a variable interest in a VIE and that
entity is determined to be the primary beneficiary of the VIE then that entity will
consolidate the VIE. As it relates to our securitized assets, we are the servicer of the
securitized assets and own the Residual Interest of the securitization trusts. As a result, we
are the primary beneficiary of our securitization trusts and consolidated those trusts that
were previously off-balance sheet at their historical cost basis on January 1, 2010. The
historical cost basis is the basis that would exist if these securitization trusts had remained
on-balance sheet since they settled. The new guidance did not change the accounting of
any other VIEs in which we had a variable interest as of January 1, 2010.” Effective 2010,
FASB guidance on securitization trusts generally eliminated so-called “gain-on-sale”
accounting treatment of securitizations and mandated consolidation of securitization
trusts. This eliminated securitization as a source of GAAP profitability and hence capital for
lenders.


On the structure side, the transaction economics of issuers have shifted over time as the
structural components of private SLABS transactions have been dictated by credit rating
agency stress cases and investors. This change is evidenced by the percentage of initial


       116            PRIVATE STUDENT LOANS
overcollateralization of the following select Sallie Mae private SLABS deals from 2005 to
2012. During the 2005-2007 timeframe, it was common for Sallie Mae’s private SLABS
trusts to require very little asset value to be contributed in excess of the liabilities (notes)
issued by the trust estate. This meant that Sallie Mae could sell loans to a trust for almost
100% of its funding cost, and recover the balance in subsequent trust payments very
quickly. This has changed significantly after the credit crisis. For example, post-TALF
transactions have required almost 30% more assets than liabilities for issuance. For every
$100 in loans sold to a trust, Sallie Mae initially receives $70. See Note 35 for NCLST
issuance metrics.


                                  Overcollateralization
     S LM ABS Transaction           at time of Issuance
2005-A                                                   0.5%
2006-A                                                   0.5%
2007-A                                                   0.5%
2010-A                                                  31.7%
2011-A                                                  20.7%
2012-A                                                  27.0%
2012-B                                                  25.9%
Source: SLM Private Credit Student Loan T rust Pre-Sale Reports
via Moody's Investors Service (note: no reports for 2008-2009)


51
     Moody’s Investors Service noted the expected difference in the credit performance of
these loans in their report Direct-To-Consumer Student Loans: Higher Risk (August 11,
2009) Moody’s states, “DTC loans typically do not have the safeguards inherent in school
channel loans that mitigate the risks borrowed funds will not be used for education or that
students will take on excessive or unnecessarily expensive debt.” At that time Moody’s
estimated the expected lifetime default rate for First Marblehead DTC loans to be 2.9
times the rate for school channel loans. Indeed, at its 2012 ASF presentation, First
Marblehead estimated that loans in its legacy portfolio in its best credit segment would
default at a lifetime rate of 10.4% while its lowest credit quality loans (predominantly DTC)
would default at a lifetime rate of 52.3%. See First Marblehead ASF 2012 Presentation
(Jan. 25, 2012) available at
http://edg1.vcall.com/irwebsites/firstmarblehead/ASF_Investor%20Presentation_FINAL.p
df. This worst class of loans makes up 47% of the total FMD securitization portfolio.

52
     For example, we reviewed ratings listings published by Moody’s as of June 6, 2012 for
one of the largest issuers. From the 78 bond classes issued between 2004 and 2007 under
the National Collegiate Student Loan Trust label, only 19 retained an investment grade,
and all had been downgraded.

53
     The mix of payment options used by borrowers has also shifted. In 2005, most loans
were fully deferred, like federal Stafford loans. After the crisis, Sample Lenders reported


       117            PRIVATE STUDENT LOANS
incenting borrowers through pricing and underwriting to make some payments during
school, either accrued interest or a nominal payment of as little as $25. Although
throughout the sample period the majority of educational loans are fully deferred,
Appendix Figure 5 shows that the share of loans that require some payments during
school increases over the sample period: for undergraduate loans in 2005, 2.6% of loans
require partial principal and interest payments during enrollment. By 2011, this proportion
had doubled to 5.2%. Also, while partial repayment did not exist for graduate and
professional school in 2005, partial repayment loans are observed starting in 2006 for
graduate loans, 2007 for medical loans, 2008 for certificate/continuing education loans (In
contrast to other graduate and professional schools, partial repayments are not observed
for law school loans).

54
     Sample Lender Data qualitative responses.

55
     For more information, see Report of the U.S. Senate Committee on Health, Education,
Labor, and Pensions (HELP) (June 14, 2007), available at
http://www.eric.ed.gov/PDFS/ED497127.pdf,the New York State Office of the Attorney
General http://www.ag.ny.gov/consumer-frauds/student-lending and a letter from the
Iowa Attorney General to the Governor, dated September 19, 2008, available at
http://www.state.ia.us/government/ag/latest_news/releases/oct_2008/9-25-08.pdf

56
     Subsections 487(a)(27) and 487(h) impose both process and disclosure requirements.
20 USC § 1094(a)(27), (h). Subsection 152(a)(1)(A)(ii) requires the school to give the same
loan application and solicitation disclosure that a lender must give to a prospective
borrower. 20 USC § 1019a(a)(1)(A)(ii). The latter is highly complex and changes whenever
the lender changes a program or a rate.

57
     In a recent survey, one third of financial aid administrators stated they had not looked at
any information about PSLs in the last year. National Association of Student Financial Aid
Administrators & Consumer Bankers Association Private Education Loans and the
Perspectives of Student Financial Aid Administrators: A 2012 Survey.

58
     The key definition is in section 140 of the Truth-in-Lending Act, 15 USC §1650, which is
incorporated by reference in section 151 (9) of the HEA, 20 USC §1019(9).

59
     See Part Three, TILA discussion.




       118             PRIVATE STUDENT LOANS
60




Private Student Loan Non-Profit ABS Issuance Volume ($ in mm’s)


                2006       2007        2008        2009        2010        2011       Total Issuance
Issuance
                1.8        1.1         0.9         1.4         2.0         0.9        8.1



61
     See above.

62
     These are technically not the “private education loan” that is the topic of this Report. See
Note 1.

63
     Sallie Mae, Form 10-K 2008 p. 8. “At the beginning of 2008, we announced the
discontinuation of non-traditional lending.”


See also, Alejandro Lazo, Sallie Mae Forecasts Surge in Defaults, Washington Post (Jan
23,2009) available at http://www.washingtonpost.com/wp-
dyn/content/article/2009/01/22/AR2009012203631_pf.html

64
     Sample Lender qualitative responses.

65
     Charge-off rates on Sallie Mae’s “non-traditional” PSL portfolio range from 7.1% (with co-
signer) to 11.6% (without co-signer) compared to traditional loss rates of 1.4% and 3.9%,
                             st
respectively. Sallie Mae, 1 Quarter 2012 Earnings Presentation, p. 18, available at
https://www1.salliemae.com/NR/rdonlyres/50F355EE-8FA7-49FA-AABF-
D4A4B507A89C/16002/Q112EarningsPresentationvFinal.pdf

66
     For example, Corinthian Colleges (COCO) reported on page 45 of its Form 10-K 2011
the creation of a $450 million “discount loan” program under which the for-profit school
provides credit support for the lender by rebating (or discounting) a portion of PSL loan
proceeds back to the lender. COCO also reported it is liable to purchase PSLs that
become 90 days past due.

67
     ITT reported such a program, dubbed PEAKS, in its Form 10-K 2011, pages 48 and 49.

68
     See Thomson StreetEvents. Final Transcript: COCO – Q4 2009 Corinthian Colleges
Earnings Conference Call. August 25, 2009. Page 9.

69
     First professional degrees may be awarded in the following 10 fields: chiropractic (D.C.
or D.C.M.), dentistry (D.D.S. or D.M.D), law (L.L.B or J.D.), medicine (M.D.), optometry



       119             PRIVATE STUDENT LOANS
(O.D.), osteopathic medicine (D.O.), pharmacy, (Pharm.D.), podiatry (D.P.M., D.P., or
Pod.D.), theology (M.Div., M.H.L., B.D., or Ordination), and veterinary medicine (D.V.M).

70
     See Tables 2 and 4.

71
     See Table 3.

72
     See Table 4, The proportion of students with loans who have a federal loan can be
calculated by summing the proportions of students who have federal loans only and
federal and non-federal loans and dividing by the proportion of students who have any
type of loan (federal only, PSL only, and federal and PSL).

73
     See Table 9.

74
     See Figure 15.

75
     See Table 6.

76
     See Table 10.

77
     See Table 12.

78
     See Table 13.

79
     In the statistics reported in this section, federal loans include PLUS loans.

80
     See Table 4.

81
     Throughout this section, t-statistics to test the equality of means are calculated under the
assumption that variances are not equal between groups, and is computed as follows:
            !!!                                           !      !
!=                   where !, ! are the sample means and !! ! , !! ! are the corresponding
        !      !                                                                              !
       !!   !!!! !                                                                !    !
                                                                                 !! !!!! !
sample variances. Degrees of freedom are calculated as ! =           !       !            !       !         .
                                                                    !!   !       !!! !   !!   !       !!!
(Larsen and Marx 2001).

82
     Larsen, Richard and Morris L. Marx. An Introduction to Mathematical Statistics and Its
Applications. 3rd Edition. Upple Saddle River, NJ: Prentice Hall, 2001.

83
     t=29.9.

84
     t=5.8.

85
     t=3.0.




       120                PRIVATE STUDENT LOANS
86
     t=5.9.

87
     t=1.0.

88
     For students age 19-23: t=7.9 for the test of equality of means with students age 18 or
younger, t=7.3 for the test of equality of means with students age 30-39, t=8.5 for the test
of equality of means with students age 40 or older. For students age 24-29, the analogous
t-statistics are 5.1, 4.9, and 5.3.

89
     For students age 19-23: t=4.7 for the test of equality of means with students age 18 or
younger, t=2.2 for the test of equality of means with students age 30-39, t=8.2 for the test
of equality of means with students age 40 or older. For students age 24-29, the analogous
t-statistics are 4.2, 1.7, and 6.6. For a test of equality of means between students age 19-23
and students age 24=29, t=0.8.

90
 For African-American undergraduates, t=5.4 for the test of equality of means with white
students, t=6.4 for the test of equality of means with Hispanic/Latino students, t=13.3 for
the test of equality of means with Asian students, t=5.3 for the test of equality of means
with students of other races.

91
 For Asian undergraduates, t=-13.0 for the test of equality of means with white students,
t=-13.2 for the test of equality of means with African-American students, t=-7.6 for the test
of equality of means with Hispanic/Latino students, t=-6.2 for the test of equality of means
with other students.

92
     t=3.3.

93
     t=2.8.

94
     t=3.9.

95
     t=-13.5.

96
     For students whose parents’ highest level of education is a post-graduate degree: t=-
10.4 for a test of equality of means with students whose parents’ highest level of education
is high school or less, t=-7.0 for a test of equality of means with students whose parents’
highest level of education is college attendance with no degree attained, t=-8.3 for a test
of equality of means with students whose parents highest level of education is an
associate’s degree or vocational training, and t=-5.4 for a test of equality of means with
students whose highest level of education is a bachelor’s degree. For students whose
parents’ highest level of education is a bachelor’s degree: t=-4.0 for a test of equality of
means with students whose parents’ highest level of education is an associate’s degree or
vocational training, t=-3.1 for a test of equality of means with students whose parents


       121             PRIVATE STUDENT LOANS
highest level of education is college attendance with no degree attained, and t=-4.3 for a
test of equality of means with students whose parents highest level of education is high
school or less.

97
     We test for equality of means by pairwise comparison of means of groups. t=-1.3 for the
test of equality of means between students with whose parents have a high school degree
or less with students whose parents attended college but have no degree, t=-1.0 for the
test of equality of means between students whose parents have a high school degree or
less with students whose parents have an associate’s degree or vocational training, t=1.57
for a test of equality of means for students whose parents have a high school degree or
less to those whose parents have a bachelor’s degree, t=0.4 for a test of equality of means
between students whose parents have a high school education or less to those whose
parents have post-graduate degrees. For students whose parents have attended college
degree, t=0.3 for a test of equality of means with students whose parents have an
associate’s degree or vocational training, t=0.3 for a test of equality of means with students
whose parents have bachelor’s degrees, and t=0.9 for a test of equality of means for
students whose parents have post-graduate degrees. For students whose parents have
associate’s degrees or vocational training, t=0 for a test of equality of means with
students whose parents have bachelor’s degrees and t=0.6 for a test of equality of means
for students whose parents have post-graduate degrees. For students whose parents have
bachelor’s degrees, t=0.8 for a test of equality of means with students whose parents have
bachelor’s degrees.

98
     For students whose parents highest level of education is high school or less: t=1.2 for
the test of equality of means with the students whose parents highest level of education is
college attendance with no degree, and t=-0.8 for the test of equality of means with
students whose highest level of education is an associate’s degree or vocational training.

99
     t=-3.0.

100
      t=3.3.

101
      t=1.2.

102
      For students whose parents’ highest level of education is a bachelor’s degree: t=-4.3
for a test of equality of means with students whose parents’ highest level of education is
high school or less, t=-3.1 for a test of equality of means with students whose parents’
highest level of education is college attendance with no degree attained, and t=-4.0 for a
test of equality of means with students whose parents highest level of education is an
associate’s degree or vocational training.

103
      We test for equality of means by pairwise comparisons of means by group. For students
whose families have income in the first quartile, t=-3.6 for a test of equality of means with


       122             PRIVATE STUDENT LOANS
students with family income in the second quartile, t=-2.9 for a test of equality of means
with students with family income in the second quartile, and t=5.6 for a test of equality of
means with students with family income in the fourth quartile. For students with whose
families have incomes in the second quartile, t=0.9 for a test of equality of means with
students with family income in the third quartile and t=9.0 for a test of equality of means
with students with family income in the fourth quartile. For students with family income in
the third quartile, a t=8.6 for a test of equality of means with students with family income in
the fourth quartile.

104
      For the test of equality of mean PSL usage between private two-year for-profit
institutions and two-year public institutions, t=12.6 and for the test of equality of means
between private two-year for-profit institutions and two-year private not-for-profit
institutions t=5.2.

105
      For the test of equality of mean PSL usage between private four-year for-profit
institutions and four-year public institutions, t=16.3 and for the test of equality of means
between private four-year for-profit institutions and four-year private not-for-profit
institutions t=10.7.

106
      t=3.0.

107
      These percentages are computed by dividing the point-estimate of the proportion of
students with both non-private and private loans by the sum of the proportion of students
with private and non-private loans and the proportion of students with private loans only in
the appropriate institution sector category.

108
      t=28.3.

109
      Obtained by dividing the sum of the proportion of students with PSL only and the
proportion of students with PSL and non-private loans by the sum of the proportion of
students with PSL only, the proportion of students with PSL and non-private loans, and the
proportion of students with non-private loans only.

110
      t=26.8.

111
      This does not differ significantly from the proportion who use PSLs among students in
bachelor’s degree programs: t=1.7.

112
      t=15.8.

113
      t=3.5.

114
      t=5.3.


       123             PRIVATE STUDENT LOANS
115
      t=4.2.

116
      t=5.9.

117
      t=5.9.

118
      t=6.1.

119
      Tabulations from NPSAS:08 using the following variables: PRIVPACK, TOTGRT,
PAREDUC, INATHAMT, TOTWKST and OTHTYPE.

120
      The proportion of students with non-private loans only who have grants is 5.3
percentage points higher than the proportion of students with a combination of non-
private and private loans (t=5.1).

121
      The difference in mean grant amounts for students with non-private loans only and
students with a both non-private loans and private loans is $48, which is not statistically
significant (t=0.3).

122
      There is a 1.1 percentage point difference in work study participation between the
proportion of students who have a combination of non-private and private loans and
students with non-private loans only, but this difference is not statistically significant at the
95% confidence level (t=1.68).

123
      This is obtained by dividing the percentage of students who filed a FAFSA but did not
receive a Stafford loan (10.9%) by the total percentage of students who filed a FAFSA
(100% – 12.2%). 12.4% = 10.9%/88.8%.

124
      Obtained by dividing the percentage of PSL borrowers who obtained a Stafford loan
and received less than the maximum amount (31.4%) by the total percentage of PSL
borrowers who received Stafford loans (the 31.4% of PSL borrowers that did not exhaust
their Stafford loan limits and the 45.5% of PSL borrowers who exhausted their PSL).

125
      For individuals who started at public 4-year schools: t=2.8 for the test of equality of
means with individuals who started at private for-profit 4 year institutions, t=3.0 for the test
of equality of means with individuals who started at public 2-year institutions, t=3.2 for the
test of equality of means with individuals who started at private not-for-profit 2 year
schools, t=6.3 for the test of equality of means with individuals who started at private-for-
profit two-year schools, and t=9.7 for the test of equality of means with individuals who
started at private-for-profit less than two-year schools. For individuals who started at
private not-for-profit 4-year schools: t=3.4 for the test of equality of means with individuals
who started at private for-profit 4 year institutions, t=4.3 for the test of equality of means
with individuals who started at public 2-year institutions, t=3.7 for the test of equality of


       124             PRIVATE STUDENT LOANS
means with individuals who started at private not-for-profit 2 year schools, t=7.5 for the
test of equality of means with individuals who started at private-for-profit two-year schools,
and t=9.7 for the test of equality of means with individuals who started at private-for-profit
less than two-year schools.

126
      t=1.8.

127
      Computed from BPS:04/09 using variables PROUT6, RPYAMT09, and LNTY09B,
restricted to PSL borrowers.

128
      t=3.0.

129
      t=4.1.

130
      t=3.2.

131
      For the test of equality of means for bachelor’s degree recipients and certificate
recipients, t=3.7 and for the test of equality of means for bachelor’s degree recipients and
those who left without a degree t=5.4.

132
      For the test of equality of means for associate’s degree recipients and certificate
recipients, t=2.1 and for the test of equality of means for associate’s degree recipients and
those who left without a degree t=2.5.

133
      t=0.5.

134
      See Figures 8, 9, 16, and 17.

135
      Private (Non-Guaranteed) Student Loan Defaults: Stable at High Levels in 2012,
Moody’s Student Loan Scholar, March 19, 2012, at p. 5.

136
      See Table 15.

137
      See First Marblehead presentation in Note 51.

138
      This discussion is limited to repayment mitigation plans where the borrower has
economic hardship from underemployment and unemployment. All for-profit lenders offer
some form of extended deferment for returning to school or for active duty military
service.

139
      Income based repayment (IBR) ties a borrower’s payment to their income and family
size, Income contingent repayment (ICR) is similar to IBR except that it provides an option
to caps payment at 20% of monthly discretionary income and allows for capitalization of


       125             PRIVATE STUDENT LOANS
interest of up to 10% of the original principal. Direct loans also offer public service loan
forgiveness, which forgives the balance on the loan after 120 on-time monthly payments
while employed full time by certain public service employers.

140
      For many, this was based on the TERI guarantor servicing rules. See Note 20.

141
      The prudential regulatory pressure on forbearance policies is enshrined in CBNE Policy
Guidance 2010-02, issued by the OCC in August 2010. It specifically criticizes banks who
offered FFELP-like forbearance programs. Consistent with this guidance, OCC-regulated
banks now report offering forbearance only for one or two month duration, requiring
extended continuous, timely payments before another forbearance will be considered.

142
      In their qualitative responses, Sample Lenders show uniform adoption of this policy,
consistent with regulatory guidance interpreting FFIEC accounting rules. CBNE Policy
Guidance 2010-02 issued by the OCC in August 2010.

143
      These trusts originally totaled $10.8 billion . These trusts also include the so-called
“modified graduated repayment system,” which allows up to a year of payments at $50
and a further year of interest-only payments. Source: Sample Lender qualitative data.

144
      See the OCC interpretation of FFIECC accounting rules at Note 141.

145
      See Note 141. Sample Lender qualitative responses did not address treatment of co-
signers with regard to the new practice of one month at a time forbearance.

146
      Principal write downs might be permitted by accounting rules for portfolio lenders.
Securitization trustees likely would not have that discretion.

147
      That term is defined in section 1002(14) of Dodd-Frank and generally refers to laws
with respect to which the CFPB has rulemaking authority.

148
      15 USC § 1640 et. seq.

149
      15 USC § 1691 et. seq.

150
      15 USC § 1681 et. seq.

151
      15 USC § 1601 et. seq.

152
      15 USC § 41 et. seq.

153
      Title X of Dodd-Frank.




       126             PRIVATE STUDENT LOANS
154
      12 C.F.R.§ 1026.17.

155
      12 C.F.R. § 1026.46 & 1026.47.

156
      12 C.F.R. § 1026.46 & 1026.47.

157
      12 C.F.R. § 1026.48(e).

158
      On July, 21, 2011, upon transfer of authority to the CFPB.

159
      Some forms of servicing, i.e., of loans that are “obtained” when they are not in default
are not technically subject to FDCPA. 15 USC § 1692a(6)(F)(iii). The CFPB’s consideration
of student loan servicing complaints is not limited to behaviors specifically proscribed by
FDCPA.

160
      The College Board, Trends in Student Aid 2006, 2007, 2008, 2009, 2010 & 2011.

161
      There were adjustments to Stafford limits for independent undergraduates in 2008. See
Table in Note 14.

162
      Moody’s Investors Service, Direct-To-Consumer Student Loans: Higher Risk, August 11,
2009.

163
      See Figure 6.

164
      Stafford loans and PSLs are both non-dischargeable in bankruptcy in almost all cases.
11 U.S.C. § 523(a) (8). Discharge is possible in the case of “undue hardship to the debtor
and his dependents.”


This standard is very difficult to meet. Brunner v. New York State Higher Educ. Servs. Corp.,
831 F. 2d 395 (2d Cir. 1987)

165
      P. L. 98–353, (July 10, 1984).

166
      See Note 20.

167
      For example, SLC, a Citibank affiliate, Key Bank and Bank of America, all made PSLs
prior to 2005, frequently without using a non-profit guarantor.

168
      11 U.S.C.§ 523(a)(8).

169
      Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).




       127             PRIVATE STUDENT LOANS
170
      See Table 16.

171
      The table shows bankruptcy status at a point in time as a percentage of total loans
outstanding at a point in time. In the Sample Lender Portfolio data, bankruptcy status of a
particular borrower changes over time, just as total portfolio size changes over time.
Chapter 7 proceedings generally take less than a year. Chapter 13 proceedings can take
up to five years. Therefore, the total loans that have been in bankruptcy out of the Sample
Lender Portfolio is more than the 1.3% in that status at the end of 2011, but less than an
arithmetic sum of all of the percentages shown for all the years in the table (i.e., less than
5.6%).

172
   The following table shows the spike in bankruptcy that coincided with the effective
date of the bankruptcy law changes of October 17, 2005.
                                                                                                   Bankrupt	
  Loans	
  as	
  a	
  %	
  of	
  120+	
  days	
  past	
  due	
  loans	
  ($	
  in	
  MM's)

                                                                        Q3	
  05                                  Q4	
  05                             Q1	
  06                          Q2	
  06                          Q3	
  06                          Q4	
  06
                                                                                           	
                                        	
  
                           120+	
  Days	
  Past	
  Due 	
  	
  	
  	
  	
  	
  	
  	
  	
  301.3 	
  	
  	
  	
  	
  	
  	
  	
  	
  241.9 	
  	
  	
  	
  	
  	
  	
  225.5 	
  	
  	
  	
  	
  	
  	
  308.1 	
  	
  	
  	
  	
  	
  	
  346.8 	
  	
  	
  	
  	
  	
  	
  542.1

                                                                                                                                             	
  
                         Loans	
  i n	
  Bankruptcy 	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  98.9 	
  	
  	
  	
  	
  	
  	
  	
  	
  241.2 	
  	
  	
  	
  	
  	
  	
  173.9 	
  	
  	
  	
  	
  	
  	
  127.6 	
  	
  	
  	
  	
  	
  	
  139.3 	
  	
  	
  	
  	
  	
  	
  154.9

             Bankrupt	
  as	
  a	
  %	
  of	
  120+	
  dpd                                            32.8%                              99.7%                           77.1%                            41.4%                           40.2%                           28.6%


Source: Sample Lender data

173
      From the Sample Lender data, between 2Q05 and 4Q06 the underlying index
increased by 222 bps while the mean interest rate in our sample rose by 303 bps.

174
      Many of the Sample Lenders did in fact use the TERI guaranty during the period in
question. See Note 20 re: TERI.

175
      Impact of the Bankruptcy Exception for Private Student Loans or Private Student Loan
Availability, Finaid.org, August 14, 2007.

176
      See Figure 8

177
      For example, TERI has a 25-year history of filing rates and recoveries on non-
dischargeable PSLs. TERI’s data on post-filing recoveries is a proxy for additional losses
that would flow from a reversion to pre-2005 law.

178
      Moody’s, Moody’s Weekly Credit Outlook, (April 2, 2012) p. 22-23

179
      Moody’s, Moody’s Weekly Credit Outlook, (April 2, 2012) p. 22-23




       128                     PRIVATE STUDENT LOANS
180
      Moody’s, Moody’s Weekly Credit Outlook, (April 2, 2012) p. 22-23

181
      H. Rept. 95-595 at 133 (1977).

182
      H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6424.

183
      See above.

184
      Guaranteed Student Loan Program Bankruptcies (GAO-HRD-77-83, April 1977).

185
      “Discharge, Exceptions to Discharge, and Objections to Discharge,” p. 120, National
Bankruptcy Review Commission available at:
http://govinfo.library.unt.edu/nbrc/report/07consum.html

186
      See above.

187
      Arguably, if Congress finds that the current policy of non-dischargeability of PSLs for
pre-creditworthy students creates more harm than benefit for students, then certainly the
policy of non-dischargeability for loans with creditworthy co-signers would create more
harm than benefit for consumers.

188
      11 U.S.C. §707(b).

189
      11 USC § 707(b)(3)(A).

190
      11 U.S.C. §1328(a).

191
      11 U.S.C. §1328(b).

192
      11 U.S.C. §1325(b).

193
      11 U.S.C. §707(a)(4).

194
      Education Amendments of 1976, P.L. 94-482, § 127(a), 90 Stat. 2141 (effective
September 30, 1977).

195
      Higher Education Act Amendments of 1998, P.L. 105-244 §971 (1998).

196
      See Association of Accredited Cosmetology v. Alexander, 979 F.2d 859, 860
(D.C.Cir.1992); see also “Abuses in Federal Student Aid Programs,” Report by the
Permanent Subcommittee on Government Affairs, S. Rep. 102–58 (1991).




       129             PRIVATE STUDENT LOANS
197
      The ECOA prohibits discrimination because of race, color, religion, national origin, sex,
marital status, age (if the applicant is old enough to enter into a contract), receipt of
income from any public assistance program, or the exercise in good faith of a right under
the Consumer Credit Protection Act. See 15 U.S.C. § 1691(a)(1).

198
      See 12 C.F.R. pt. 1002, Supp. I, § 1002.6, ¶ 6(a)-2.

199
      In the Attorney General’s 2011 Annual Report to Congress pursuant to the ECOA
Amendments of 1976, the Department of Justice reported that the FDIC had referred a
matter on student loan pricing discrimination. As of the date of the 2011 Annual Report,
the Department of Justice was investigating this matter. See U.S. Dept. of Justice Annual
Report to Congress Pursuant to the Equal Credit Opportunity Act, at 15 and 18 (2012).

200
      In 2007, a class-action lawsuit was filed against Sallie Mae, the largest private education
lender in the country, alleging discrimination based on the use of CDR in setting eligibility
cutoffs, as well as underwriting and pricing student loans. See Rodriguez et al v. Sallie
Mae, Inc. and SLM Corporation, D.Conn., Case No. 3:07-cv-01866-WWE. The public
docket in that case indicates that the matter settled.

201
      Most Sample Lenders also report reliance on other nominal criteria such as requiring
that a school be Title IV eligible, be located in the United States or Canada, and have had
no sanctions imposed by the Department related to financial, administrative, or loan
performance reasons. Some Sample Lenders report an attempt to mitigate the effect of
CDR cutoffs by excepting Historically Black Colleges and Universities.

202
      An analysis of other institution-specific criteria such as graduation rate is beyond the
scope of this Report; however, we did analyze the correlation of CDR to graduation rate
and found the two variables to be highly correlated to each other. Accordingly, setting
eligibility cutoffs based on graduation rate may present similar concerns to setting cutoffs
based on CDR.

203
      12 U.S.C. § 2801, et seq.

204
      See Regulation B, 12 C.F.R. §§ 1002.5 and 1002.13.

205
      The ability to obtain such data may be spread across multiple federal regulators to the
extent that some student lenders are not subject to direct exclusive examination by the
Bureau, if they have less than ten billion dollars in assets.

206
      To analyze the relationship between CDR and schools’ racial and ethnic demographics
we studied 2007, 2008, and 2009 IPEDS data on school characteristics and enrollment,
including statistics on race and ethnicity, with the Department’s official CDRs from 2007,




       130             PRIVATE STUDENT LOANS
2008, and 2009. Due to the two-year nature of the statistic, 2007, 2008, and 2009 are the
three most recent CDR datasets available as of the writing of this Report.

207
      The Agencies also carried out a regression analysis with CDR as the dependent variable
and various racial and ethnic demographic categories as the explanatory variables. This
analysis confirmed the results shown in Table 20. For example, the regression analysis
showed that for 2009 a 1% increase in CDR corresponded to a 0.6% increase in the
percentage of African-American students. For 2007 and 2008, a 1% increase in CDR
produced a 0.7% increase in African-American enrollment. The comparable percentages
for Hispanics ranged from 0.7% to 0.9% during the period.

208
      Results for the 2006-2007 and 2007-2008 academic years can be reviewed in the Data
Appendix, see Appendix Figure 6. We tested the 8% cutoff because it is the most common
CDR cutoff used by Sample Lenders, not because it has any obvious intrinsic predictive
value.

209
      If a group has the same distribution as the overall population of students the odds ratio
would be “1”; if a group has an odds ratio of “2” it would imply that students in the group
are twice as likely as students in general to attend a school above the threshold; if a group
has an odds ratio of “0.5” it would imply that students in the group are half as likely as
students in general to attend a school above the threshold.

210
      Both the 8% and 12% calculations are statistically significant at the 95% confidence
level.

211
      Results for the 2006-2007 and 2007-2008 academic years can be reviewed in the Data
Appendix.

212
      Source: IPEDS 2007 - 2008 and PEPS. Data are reported for the 50 States, D.C., Puerto
Rico, and the territories.

213
      Source: IPEDS 2007 - 2008 and PEPS. Data are reported for the 50 States, D.C., Puerto
Rico, and the territories.




       131             PRIVATE STUDENT LOANS

				
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